Climate Risk, Insurance Premiums, and the Effects on Mortgages 

Abstract

As climate change exacerbates natural disasters, homeowners' insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers' mortgage outcomes using a novel dataset on home insurance policies for 6.7 million borrowers. We find that higher premiums raise the probability of mortgage delinquency and prepayment. Results hold using a novel instrumental variable. The mortgage delinquency effect is greater for higher loan-to-value mortgages, while the prepayment effect is smaller for these loans. The effects are present in both GSE and non-GSE mortgages. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system. 

Keywords: insurance, mortgage, delinquency, prepayment, credit, climate change