Real estate debt and flood risk: who is financially exposed?

Since 1980, flooding and tropical cyclones have caused over 1 trillion in damages in the United States and represent over 75% of the losses from 'Billion Dollar Weather and Climate Disasters' nationwide. Residential and commercial property owners bear a substantial portion of the resulting financial risk, but it is unclear how this risk is extended to lenders and other financial institutions who may become exposed to increased mortgage default rates. In 2017 and 2018 alone, three separate flooding events (Harvey, Irma, and Florence) exceeded 20 billion in residential/commercial property damages, over 75% of which was uninsured. The spatially concentrated nature of flood damages can cause reduced property values in flood-impacted neighborhoods, limiting the access of property owners to private borrowing markets that can be used to finance repairs. Substantial rebuilding costs combined with reduced property values can wipe out owner equity in flooded properties and put mortgages at risk of default. Here, we develop a dynamic, spatial model of the relationship between flood damages and property values by integrating detailed market data on real estate transactions and new mortgage originations with a non-stationary, building-level flood risk framework developed for the Brays Bayou Watershed in Houston, TX. Using newly released National Flood Insurance Program (NFIP) policy-level data from FEMA and estimates of property value changes over time, we can evaluate the effectiveness of property owner-level financial resources for mitigating the costs of flooding damages, including insurance payments and additional borrowing against owner equity in the property. Results have implications for predicting mortgage defaults and illustrate how risk can be transmitted from individual property owners to banks and other financial institutions.