Climate Change & Risk Management
Considerable meteorological research suggests that the frequency and intensity of North Atlantic hurricanes are on the rise with 2020 expected to be one of the busiest on record. Loans, where a category three, four, or five hurricane was experienced during the loan’s life, were found to be 13-18 percent more likely to become 180 days or 90 days delinquent or more, respectively than other loans in the same locations, controlling for all other risk factors.
If long-term hurricane trends bear out, mortgage default risk in areas with a higher incidence of major hurricanes will likely rise significantly over time. This paper finds that the government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Housing Administration are potentially underpricing hurricane risk effects on default and that the use of catastrophe bonds offer one way to manage these risks.
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