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

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Abstract

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.

Suggested Citation

  • David M. Arseneau & Gazi I. Kara, 2025. "Do Banks Price Flood Risk in Mortgage Origination: Evidence from a Natural Experiment in New Orleans," Finance and Economics Discussion Series 2025-081, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-81
    DOI: 10.17016/FEDS.2025.081
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    References listed on IDEAS

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    1. Hung-Chih Hung, 2009. "The attitude towards flood insurance purchase when respondents' preferences are uncertain: a fuzzy approach," Journal of Risk Research, Taylor & Francis Journals, vol. 12(2), pages 239-258, March.
    2. Okmyung Bin & Jamie Brown Kruse & Craig E. Landry, 2008. "Flood Hazards, Insurance Rates, and Amenities: Evidence From the Coastal Housing Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 63-82, March.
    3. Atreya, Ajita & Ferreira, Susana & Michel-Kerjan, Erwann, 2015. "What drives households to buy flood insurance? New evidence from Georgia," Ecological Economics, Elsevier, vol. 117(C), pages 153-161.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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