Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters
Using the government-sponsored enterprises’ sharp securitization rules, this paper provides evidence that, in the aftermath of natural disasters, lenders are more likely to approve mortgages that can be securitized, thereby transferring climate risk. The identification strategy uses the GSEs’ time-varying conforming loan limits at which mortgages bunch. Natural disasters increase bunching, suggesting an increased option value of securitization. The increase is lower where flood insurance is required. A model identified using indirect inference simulates increasing disaster risk without GSEs. Mortgage credit supply would decline in flood zones and lenders would have a greater incentive to screen mortgages.
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