Unintended Consequences of "Mandatory" Flood Insurance

55 Pages Posted: 18 Apr 2022

See all articles by Kristian Blickle

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: April 2022

Abstract

We document that the quasi-mandatory U.S. flood insurance program reduces mortgage lending along both the extensive and intensive margins. We measure flood insurance mandates using FEMA flood maps, focusing on the discreet updates to these maps that can be made exogenous to true underlying flood risk. Reductions in lending are most pronounced for low-income and low-FICO borrowers, implying that the effects are at least partially driven by the added financial burden of insurance. Our results are also stronger among non-local or more-distant banks, who have a diminished ability to monitor local borrower adherence to complicated insurance mandates. Overall, our findings speak to the unintended consequences of (well-intentioned) regulation. They also speak to the importance of factoring in affordability and enforcement feasibility when introducing mandatory standards.

Keywords: insurance, unintended consequences, regulation, FEMA maps, flooding, mortgage lending, access to credit

JEL Classification: G21, G28, Q5, Q54

Suggested Citation

Blickle, Kristian and Santos, João A. C., Unintended Consequences of "Mandatory" Flood Insurance (April 2022). FRB of New York Staff Report No. 1012, Available at SSRN: https://ssrn.com/abstract=4086765 or http://dx.doi.org/10.2139/ssrn.4086765

Kristian Blickle (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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