Climate Risk, Insurance Premiums and the Effects on Mortgage and Credit Outcomes

Shan Ge (), Stephanie Johnson and Nitzan Tzur-Ilan
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Shan Ge: https://www.stern.nyu.edu/faculty/bio/shan-ge

No 2505, Working Papers from Federal Reserve Bank of Dallas

Abstract: As climate change exacerbates natural disasters, homeowners’ insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers’ mortgage and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment (driven mainly by relocation). The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present in both GSE and non-GSE mortgages. We also find that higher premiums significantly raise the probability of credit card delinquency and worsen borrowers’ creditworthiness. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system.

Keywords: climate change; insurance; mortgage; delinquency; prepayment; credit cards (search for similar items in EconPapers)
JEL-codes: D14 G21 G22 G5 G52 G53 Q54 R21 R3 (search for similar items in EconPapers)
Pages: 58
Date: 2025-01-16
New Economics Papers: this item is included in nep-env and nep-ure
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DOI: 10.24149/wp2505

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