Mortgage Markets with Climate-Change Risk: Evidence from Wildfires in California

Abstract

This paper studies wildfires in California from 2000 to 2018 using comprehensive merged data
on fires, mortgage and property characteristics, and weather. We find a significant increase in mortgage delinquency and foreclosure after a fire, but these effects decrease in the size of the fire,
which we argue results from coordination externalities afforded by large fires. Recent large losses,
combined with regulatory distortions, cast doubt on the continued ability of insurance companies
to absorb fire-related losses. This paper provides central banks and insurance regulators with
a framework for evaluating proposed banking and insurance-company models, similar to bank
stress-testing.