Do Banks Price Flood Risk in Mortgage Origination: Evidence from a Natural Experiment in New Orleans

This paper uses a large-scale redrawing of flood zone maps for the City of New Orleans in 2016 to identify how banks respond to changes in perceived flood risk in residential mortgage origination. Using geo-coding, we separate loan-level data on mortgage originations into treatment versus control groups based on how individual properties were affected by the map changes. We find banks charged interest rates that were roughly 6 basis points higher for mortgages on treated properties that were removed from the special floods zones as a result of the map changes. In addition, lower loan-to-value ratios for mortgages on these properties suggest that banks also required higher downpayments. Both effects are temporary, lasting under two years. Further analysis using flood insurance claims data following a major flooding event in 2017 suggests the temporary nature of these effects may reflect learning by banks about the true extent of flood risk and insurance take-up following the map changes.