Flood Risk Exposures and Mortgage-Backed Security Asset Performance and Risk Sharing

Jacob Dice, Mallick Hossain and David Rodziewicz

No RWP 24-05, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: The distribution of risks for residential real estate, including flood risk, depends largely on how these risks are allocated across individual mortgages and within mortgage-backed securities (MBS). This paper is the first to document how flood risks relate not only to individual mortgage performance and underwriting, but also how flood risks correlate to MBS performance and structure. Across residential mortgages we find that defaults are concentrated among the most flood-prone properties and this risk is somewhat offset by larger down payments and slightly higher mortgage rates. Even when mortgages are combined into MBS’s, we show that average mortgage default within MBS’s increases with average flood risk and that higher flood risk is primarily offset by increased credit protection or subordination; a one unit increase in flood risk is associated with a 2.6 percent increase in subordination. Ultimately, our analysis suggests that flood risk is reflected in mortgage-level performance and pricing and is partially, but not fully, accounted for in MBS deal-level performance and structure.

Keywords: climate risk; flooding; mortgage-backed securities; structured finance; bond markets (search for similar items in EconPapers)
JEL-codes: D89 G12 Q54 R30 (search for similar items in EconPapers)
Pages: 43
Date: 2024-05-21
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:98510

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DOI: 10.18651/RWP2024-05

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