Who bears flood risk? evidence from mortgage markets in florida

Abstract

who bears flood risk? evidence from mortgage markets in florida∗ parinitha sastry† mit sloan school of management november 18, 2021 job market paper please click here for the latest version. abstract this paper explores how residential mortgage contracts distribute flood risk exposures across banks, households, and the government flood insurer. i merge newly digitized federal flood maps with geo-located mortgage data to obtain loan-level classifications of flood risk. strict flood insurance coverage limits and staggered flood map updates provide plausibly exogenous variation in flood risk exposures and assessments. i find that banks manage flood risk by rationing credit through lower loan-to-value (ltv) ratios, which reduces negative borrower equity after floods. however, banks only adjust ltvs when flood insurance coverage limits bind, showing that they offload flood risk to the government flood insurer. increased credit rationing after flood map updates shifts the composition of mortgages towards richer and higher credit quality borrowers. i conclude that lenders screen for flood risk when they retain residual exposures to it, and that their credit rationing has distributional consequences for who moves into flood zones. ∗i am grateful to my advisors david thesmar, antoinette schoar, and christopher palmer for their invaluable guidance and continuous encouragement at every stage of this project. i also thank clare balboni, aymeric bellon, ben bernanke, taha choukhamane, aileen devlin, maryam …

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