Climate Risk and Mortgage Markets: Evidence from Hurricanes Harvey and Irma

Lun, 17/01/2022 - 12:00 / 13:00

203, Viale Romania

Speaker: Athena Tsouderou , IE University

Abstract: 

This paper quantifies the extent to which government-sponsored enterprises (GSEs) subsidize credit risk from natural disasters in U.S. mortgages. We study a unique, hand-collected database of the new mortgage Credit Risk Transfers (CRTs). First, we estimate diff-in-diff regressions that exploit heterogeneous geographical exposure of CRTs to Hurricanes Harvey and Irma, as well as heterogeneity in risk exposure across CRT tranches. The parallel trends identifying assumption is satisfied. Yields of CRTs with different exposure to the hurricanes' default risk move in parallel until shortly before the landfall of the hurricanes. We find significant increases in the yields, up to 9%, for those CRTs more exposed to hurricane credit risk. Second, we estimate logistic regressions to quantify hurricane-induced mortgage defaults in U.S. counties. Finally, we use a model of mortgage credit supply calibrated to match the diff-in-diff estimates. Using the logistic regression results as inputs to the model, we derive the market price of mortgage credit risk (the g-fees) for every U.S. county. We find that g-fees in counties most exposed to hurricanes would be 72% higher than in inland counties if they were priced by the market. The GSEs give g-fee subsidies that prevent internalizing climate risk.