Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters

Abstract Using the government-sponsored enterprises’ sharp securitization rules, this paper provides evidence that, in the aftermath of natural disasters, lenders are more likely to approve mortgages that can be securitized, thereby transferring climate risk. The identification strategy uses the time-varying conforming loan limits above which the government-sponsored enterprises do not securitize mortgages. Natural disasters lead to more securitization right below the limit, suggesting an increased option value of securitization. A model identified using indirect inference simulates increasing disaster risk without GSEs. Mortgage credit supply would decline in flood zones and lenders would have a greater incentive to screen mortgages.