IDEAS home Printed from https://ideas.repec.org/p/fip/fedkrw/98510.html
   My bibliography  Save this paper

Flood Risk Exposures and Mortgage-Backed Security Asset Performance and Risk Sharing

Author

Abstract

The distribution of risks for residential real estate, including flood risk, depends largely on how these risks are allocated across individual mortgages and within mortgage-backed securities (MBS). This paper is the first to document how flood risks relate not only to individual mortgage performance and underwriting, but also how flood risks correlate to MBS performance and structure. Across residential mortgages we find that defaults are concentrated among the most flood-prone properties and this risk is somewhat offset by larger down payments and slightly higher mortgage rates. Even when mortgages are combined into MBS’s, we show that average mortgage default within MBS’s increases with average flood risk and that higher flood risk is primarily offset by increased credit protection or subordination; a one unit increase in flood risk is associated with a 2.6 percent increase in subordination. Ultimately, our analysis suggests that flood risk is reflected in mortgage-level performance and pricing and is partially, but not fully, accounted for in MBS deal-level performance and structure.

Suggested Citation

  • Jacob Dice & Mallick Hossain & David Rodziewicz, 2024. "Flood Risk Exposures and Mortgage-Backed Security Asset Performance and Risk Sharing," Research Working Paper RWP 24-05, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:98510
    DOI: 10.18651/RWP2024-05
    as

    Download full text from publisher

    File URL: https://www.kansascityfed.org/Research%20Working%20Papers/documents/10184/rwp24-05dicehossainrodziewicz.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.18651/RWP2024-05?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Yuqin Zhou & Shan Wu & Zhenhua Liu & Lavinia Rognone, 2023. "The asymmetric effects of climate risk on higher-moment connectedness among carbon, energy and metals markets," Nature Communications, Nature, vol. 14(1), pages 1-16, December.
    2. Zeileis, Achim & Grothendieck, Gabor, 2005. "zoo: S3 Infrastructure for Regular and Irregular Time Series," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 14(i06).
    3. Stuart Capstick & Lorraine Whitmarsh & Wouter Poortinga & Nick Pidgeon & Paul Upham, 2015. "International trends in public perceptions of climate change over the past quarter century," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 6(1), pages 35-61, January.
    4. Stuart Capstick & Lorraine Whitmarsh & Wouter Poortinga & Nick Pidgeon & Paul Upham, 2015. "International trends in public perceptions of climate change over the past quarter century," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 6(4), pages 435-435, July.
    5. Bernstein, Asaf & Gustafson, Matthew T. & Lewis, Ryan, 2019. "Disaster on the horizon: The price effect of sea level rise," Journal of Financial Economics, Elsevier, vol. 134(2), pages 253-272.
    6. Nicola Cetorelli & Stavros Peristiani, 2012. "The Dominant Role of Banks in Asset Securitization," Liberty Street Economics 20120719, Federal Reserve Bank of New York.
    7. Jesse D. Gourevitch & Carolyn Kousky & Yanjun (Penny) Liao & Christoph Nolte & Adam B. Pollack & Jeremy R. Porter & Joakim A. Weill, 2023. "Unpriced climate risk and the potential consequences of overvaluation in US housing markets," Nature Climate Change, Nature, vol. 13(3), pages 250-257, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iwowari Beatrice Dute, 2020. "The Influence of Cross-Cultural Language and Background on Climate Change Perception – An Empirical Investigation," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 7(9), pages 50-55, September.
    2. Douenne, Thomas & Fabre, Adrien, 2020. "French attitudes on climate change, carbon taxation and other climate policies," Ecological Economics, Elsevier, vol. 169(C).
    3. Sam Crawley & Hilde Coffé & Ralph Chapman, 2022. "Climate Belief and Issue Salience: Comparing Two Dimensions of Public Opinion on Climate Change in the EU," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 162(1), pages 307-325, July.
    4. Byungdoo Kim & David L. Kay & Jonathon P. Schuldt, 2021. "Will I have to move because of climate change? Perceived likelihood of weather- or climate-related relocation among the US public," Climatic Change, Springer, vol. 165(1), pages 1-8, March.
    5. Audronė Minelgaitė & Genovaitė Liobikienė, 2021. "Changes in pro-environmental behaviour and its determinants during long-term period in a transition country as Lithuania," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(11), pages 16083-16099, November.
    6. Upendra Bom & John Tiefenbacher & Shashidhar Belbase, 2023. "Individual and community perceptions of climate change in Lower Mustang, Nepal," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(7), pages 5997-6031, July.
    7. D. Liliana González-Hernández & Raúl A. Aguirre-Gamboa & Erik W. Meijles, 2023. "The role of climate change perceptions and sociodemographics on reported mitigation efforts and performance among households in northeastern Mexico," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(2), pages 1853-1875, February.
    8. Umar, Shayan & Waqas, Adeel & Tanveer, Waqas & Shahzad, Nadia & Janjua, Abdul Kashif & Dehghan, Maziar & Qureshi, Muhammad Salik & Shakir, Sehar, 2023. "A building integrated solar PV surface-cleaning setup to optimize the electricity output of PV modules in a polluted atmosphere," Renewable Energy, Elsevier, vol. 216(C).
    9. Hoffmann, Stefan & Lasarov, Wassili & Reimers, Hanna, 2022. "Carbon footprint tracking apps. What drives consumers' adoption intention?," Technology in Society, Elsevier, vol. 69(C).
    10. Andrew G. Meyer, 2022. "Do economic conditions affect climate change beliefs and support for climate action? Evidence from the US in the wake of the Great Recession," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 64-86, January.
    11. Kevin Grecksch & Carola Klöck, 0. "Access and allocation in climate change adaptation," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 0, pages 1-16.
    12. Hein, Walter & Wilson, Clevo & Lee, Boon & Rajapaksa, Darshana & de Moel, Hans & Athukorala, Wasantha & Managi, Shunsuke, 2019. "Climate change and natural disasters: Government mitigation activities and public property demand response," Land Use Policy, Elsevier, vol. 82(C), pages 436-443.
    13. Cafferata, Alessia & Dávila-Fernández, Marwil J. & Sordi, Serena, 2021. "Seeing what can(not) be seen: Confirmation bias, employment dynamics and climate change," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 567-586.
    14. Kevin Grecksch & Carola Klöck, 2020. "Access and allocation in climate change adaptation," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 20(2), pages 271-286, June.
    15. Craig Landry & Dylan Turner, 2020. "Risk Perceptions and Flood Insurance: Insights from Homeowners on the Georgia Coast," Sustainability, MDPI, vol. 12(24), pages 1-22, December.
    16. Dylan E. McNamara & Martin D. Smith & Zachary Williams & Sathya Gopalakrishnan & Craig E. Landry, 2024. "Policy and market forces delay real estate price declines on the US coast," Nature Communications, Nature, vol. 15(1), pages 1-16, December.
    17. Marwil J. Dávila-Fernández & Serena Sordi & Alessia Cafferata, 2024. "How do you feel about going green? Modelling environmental sentiments in a growing open economy," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 19(4), pages 649-687, October.
    18. Braun, Alexander & Braun, Julia & Weigert, Florian, 2023. "Extreme weather risk and the cost of equity," CFR Working Papers 23-08, University of Cologne, Centre for Financial Research (CFR).
    19. Peter Dirksmeier & Leonie Tuitjer, 2023. "Do trust and renewable energy use enhance perceived climate change efficacy in Europe?," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(8), pages 8753-8776, August.
    20. Cha, Min-kyeong & Struthers, Cory L. & Brown, Marilyn A. & Kale, Snehal & Chapman, Oliver, 2024. "Toward residential decarbonization: Analyzing social-psychological drivers of household co-adoption of rooftop solar, electric vehicles, and efficient HVAC systems in Georgia, U.S," Renewable Energy, Elsevier, vol. 226(C).

    More about this item

    Keywords

    climate risk; flooding; mortgage-backed securities; structured finance; bond markets;
    All these keywords.

    JEL classification:

    • 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
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:98510. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Zach Kastens (email available below). General contact details of provider: https://edirc.repec.org/data/frbkcus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.