California Wildfires, Property Damage, and Mortgage Repayment
Abstract: This paper examines wildfires’ impact on mortgage repayment using novel data that combines property-level damages and mortgage performance data. We find that 90-day delinquencies were 4 percentage points higher and prepayments were 16 percentage points higher for properties that were damaged by wildfires compared to properties 1 to 2 miles outside of the wildfire, which suggests higher risks to mortgage markets than found in previous studies. We find no significant changes in delinquency or prepayment for undamaged properties inside a wildfire boundary. Prepayments are not driven by increased sales or refinances, suggesting insurance claims drive prepayment. We provide evidence that underinsurance may force borrowers to prepay instead of rebuild.
Keywords: wildfires; mortgage; prepayment risk; climate risk; physical risk; underinsurance;
JEL Classification: G21; G51; Q54;
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2023/wp23-05.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2023-03-20