Assessing the impact of hurricane frequency and intensity on mortgage delinquency

Abstract

Considerable meteorological research suggests that the frequency and intensity of North Atlantic hurricanes are rising. This analysis focuses on estimating the impacts of hurricane intensity and frequency on mortgage delinquency. Based upon a large loan-level dataset of mortgages purchased by Freddie Mac between 1999 and 2015, loans with an average lifetime Saffir–Simpson hurricane rating of 3 or more were found to be 88 per cent more likely to become delinquent than other loans in the same locations, controlling for all other risk factors. This result has important implications for mortgage and insurance markets and homeowners. First, if longterm hurricane trends bear out, mortgage default risk in areas with a higher incidence of major hurricanes will likely rise significantly over time. Secondly, investors in mortgage credit risk from these locations will face higher default losses in the future. Thirdly, private investors in mortgage credit-risk transfer (CRT) securities could experience higher credit losses of loans from hurricaneprone areas. Investors in lower-rated tranches would be particularly impacted given the nature of their exposure to losses earlier than more highly rated tranches. Catastrophe bonds could be used to diversify hurricane risks to investors that may be in a better position to assess and hold this risk.