Bailing Out Homeowners: Government Aid and Mortgage Default after Natural Disasters

Marina Hoch ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Natural disasters destroy substan al parts of homeowners' wealth and o en prompt large-scale government aid. This aid might crowd out private disaster insurance. However, homeowners already hold implicit insurance through the op on to default on mortgages. This op on shapes the welfare effects of government aid in two opposing ways. On the one hand, default already provides par al coverage, reducing the marginal value of aid. On the other hand, an cipa ng default leads households to underinsure. This underinsurance raises their financing costs and generates a commitment problem that the government can resolve. To quan fy the welfare effects of post-disaster government aid, specifically, rebuilding grants and foreclosure moratoria, I develop a structural general equilibrium model. The model embeds natural disaster shocks within an incomplete markets framework, which features two degrees of mortgage default: delinquency and foreclosure. Calibrated to the U.S. economy over 2000-2020, the model yields three main results. First, government aid increases uninsured losses by 36 percentage points and increases owner-occupied housing in disaster-prone areas by 14 percent compared with no aid. Second, government aid generates 0.25 percent aggregate welfare gains in consump on-equivalent terms, mainly benefi ng households in high-risk regions. Third, for equal fiscal cost, the greatest welfare gains occur when rebuilding transfers are provided independently of insurance coverage, thereby limi ng crowding out of private disaster insurance.

Keywords: Government Aid; Mortgage Default; Housing; Natural Disasters; Disaster Insurance; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: E21 G21 G51 H84 Q54 (search for similar items in EconPapers)
Pages: 85
Date: 2026-07
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