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 when learning the ’new news’ of default. 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. Endogenous guarantee fees are estimated.
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