Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

Abstract

Using a unique, loan-level database that combines post-disaster home inspection data, flood zone designations, and loan performance measures in the area impacted by Hurricane Harvey, we examine the link between property damage, flood insurance, and mortgage credit risk. We find that compared with homes with no damage, loans on moderately to severely damaged homes are more likely to become 90 days delinquent shortly after Harvey. However, longer-term loan performance depends on whether the property is located in areas where borrowers are required to have flood insurance. Where flood insurance is required, loan prepayment rate rises with property damage. In areas where flood insurance is not required, and very few borrowers have flood insurance, we find that as property damage increases, the likelihood of needing a loan modification increases, as does the likelihood of a loan being 180 or more days delinquent or in default during the two years following Hurricane Harvey. Thus, our findings provide direct evidence that flood insurance protects homeowners and mortgage creditors against credit risk arising from flood events.