Coastal Flood Risk in the Mortgage Market: Storm Surge Models' Predictions vs. Flood Insurance Maps

TL;DR

This study compares physical storm surge simulations with FEMA flood maps to assess coastal flood risk in the mortgage market, revealing significant unrecognized risks and demographic vulnerabilities in surge-prone areas.

Contribution

It introduces a granular, physics-based assessment method for flood risk that uncovers discrepancies with traditional flood insurance maps and highlights potential financial and social vulnerabilities.

Findings

Over $50 billion annually in mortgage originations occur outside flood insurance maps.

Mortgage activity in storm surge areas has increased sharply since 2012.

Households in surge areas tend to have lower income and higher minority representation.

Abstract

Prior literature has argued that flood insurance maps may not capture the extent of flood risk. This paper performs a granular assessment of coastal flood risk in the mortgage market by using physical simulations of hurricane storm surge heights instead of using FEMA's flood insurance maps. Matching neighborhood-level predicted storm surge heights with mortgage files suggests that coastal flood risk may be large: originations and securitizations in storm surge areas have been rising sharply since 2012, while they remain stable when using flood insurance maps. Every year, more than 50 billion dollars of originations occur in storm surge areas outside of insurance floodplains. The share of agency mortgages increases in storm surge areas, yet remains stable in the flood insurance 100-year floodplain. Mortgages in storm surge areas are more likely to be complex: non-fully amortizing features such as interest-only or adjustable rates. Households may also be more vulnerable in storm surge areas: median household income is lower, the share of African Americans and Hispanics is substantially higher, the share of individuals with health coverage is lower. Price-to-rent ratios are declining in storm surge areas while they are increasing in flood insurance areas. This paper suggests that uncovering future financial flood risk requires scientific models that are independent of the flood insurance mapping process.