Working Paper

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;

https://doi.org/10.21799/frbp.wp.2023.05

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2023-03-20

Number: 23-05