The Next Threat to Stability of the Financial System Could Be Wet

Mortgage providers may be hiding the risk related to lending in areas that are prone to flooding by moving vulnerable mortgages out of the private sector to government-sponsored home lenders, according to a paper by the National Bureau of Economic Research.

Lenders are lowering the sizes of their mortgages so the loans are eligible to be backed by Fannie Mae and Freddie Mac. Lenders are taking advantage of government housing lender guidelines that do not rely on on-the-ground information like the knowledge of local climate risk that local loan officer from a bank might have.

With the declining availability of flood insurance, homeowners hit with major storm damage to their property are more likely to default on their loans, according to the paper written by Amine Ouazad of HEC Montreal business school and Matthew Kahn of Johns Hopkins University.These types of loans put more risk on the financial system and that threat could worsen if destructive storms become bigger and more frequent due to climate change.

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