Who Bears Flood Risk? Evidence from Mortgage Markets in Florida

Abstract

This paper exploits strict flood insurance coverage limits and staggered flood map updates to show that mortgage lenders offload flood risk to the government through flood insurance contracts, and to under-insured households through higher down payments. Lender risk management leads delinquency rates to equalize inside and outside of flood zones. The combination of insurance requirements and credit rationing shift the composition of mortgages in flood zones towards richer and higher credit quality borrowers. In conclusion, lenders screen for flood risk when they retain residual exposures to it, and their credit rationing has distributional consequences for flood zones.

Keywords: lender risk management, climate risk, mortgages, insurance, floods

JEL Classification: G21, G22, G28