Working Paper

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

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;

JEL Classification: G21; G22; G5; G52; G53; R21; Q54; D14; R3;

https://doi.org/10.24149/wp2505

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2025-01-16

Number: 2505