California Wildfires, Property Damage, and Mortgage Repayment
Author: Siddhartha Biswas
Author: Mallick Hossain
Author: David Zink
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.
Date: 03/2023
URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2023/wp23-05.pdf
Date Added: 3/27/2023, 6:57:38 AM
Reading Notes:
Objective: To understand the impact of wildfires on mortgage payments
Importance: Uses property-level data on wildfire damage, rather than fire perimeter, reducing measurement error relative to previous studies
Background: From 2017 to 2021 wildfires in California led to $16.8 billion per year in losses, an over tenfold increase compared to earlier years
Households may use insurance money to pay mortgages early
Data & Key Variables:
Monitoring Trends in Burn Severity (MTBS) - Wildfire burn perimeters (2013-2020). 82 wildfires that burn 1000+ acres and damage 1+ structures
CAL Fire Damage Inspection (DINS) database - Extent of damage by parcel
Corelogic public records - parcel locations, undamaged parcels
Federal Reserve FR Y-14M - mortgage performance history
Methodology: Difference-in-differences comparing homes within the fire perimeter (both damaged and undamaged) to houses 1-2 miles outside the perimeter
24 month window before and after fire
Results: Wildfires lead to large increases in delinquencies (~4 percentage points) for properties that are damaged, but no effect for undamaged properties within the fire perimeter.
Wildfires also increase mortgage prepayment for damaged properties (~16 percentage points), which may mean households are choosing to use the insurance money to walk away from the damaged home instead of rebuilding. This may be because the insurance doesn't provide sufficient funds to rebuild (underinsured)
Key Table/Figure: