Climate risk in mortgage markets: Evidence from Hurricanes Harvey and Irma

Gete, Pedro; Tsouderou, Athena; Wachter, Susan M.

Abstract

Using the Credit Risk Transfers (CRTs) issued by Fannie Mae and Freddie Mac, we study how, absent government intervention, mortgage markets would price hurricane risk. Currently, such risk is priced equally across locations even if it is location-specific. We hand collect a novel and detailed database to exploit CRTs' heterogeneous exposure to Hurricanes Harvey and Irma. Using a diff-in-diff specification, we estimate the reaction of private investors to hurricane risk. We use the previous results to calibrate a model of mortgage lending. We simulate hurricane frequencies and mortgage default probabilities in each US county to derive the market price of mortgage credit risk, that is, the implied guarantee fees (g-fees). Market-implied g-fees in counties most exposed to hurricanes would be 70% higher than inland counties.

Citation

Gete, P., Tsouderou, A., & Wachter, S. M. (2024). Climate risk in mortgage markets: Evidence from Hurricanes Harvey and Irma. Real Estate Economics, 52(3), 660-686. https://doi.org/10.1111/1540-6229.12477

• Journal Article Type: Article
• Acceptance Date: Jan 25, 2024
• Online Publication Date: Feb 27, 2024
• Publication Date: 2024-05
• Deposit Date: Mar 20, 2024
• Publicly Available Date: Mar 22, 2024
• Journal: Real Estate Economics
• Print ISSN: 1080-8620
• Electronic ISSN: 1540-6229
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 52
• Issue: 3
• Pages: 660-686
• DOI: https://doi.org/10.1111/1540-6229.12477
• Public URL: https://durham-repository.worktribe.com/output/2333871