Do Natural Disasters Lead to Loan Default?

Do Natural Disasters Lead to Loan Default?


Homeowners whose homes are located in designated flood zones are required to purchase flood insurance, and others in areas where natural disasters are common may also be required to insure against those risks. However, CoreLogic economists recently asked if that is enough to guard against these risks. In particular, they asked, are homeowners more likely to default when natural disaster strikes?

The answer, in short, is “yes.”

“Our research demonstrates that borrowers, after controlling for their propensity to default based on traditional mortgage credit characteristics, default at a higher rate the higher the propensity of natural disaster is at the property level,” CoreLogic economists Katie Dobbyn and Mark Fleming wrote in their article, The Nature of Risk.

The likelihood of default due to natural disaster on a loan that bears a high risk for natural disaster is nearly double that of a similar loan in a low-risk area, according to CoreLogic.

“By comparison, the propensity to default because of lack of equity, as measured by origination LTV, of a high LTVloan is a little over double that of the propensity for a low risk loan,” the economists stated.

In other words, the risk is similar to other standards traditionally accounted for in loan underwriting.

Miami, Florida ranked as the riskiest market for natural hazards.

A majority—16—of the top 20 riskiest markets for natural hazard, according to CoreLogic, are located in Florida or California. New Orleans, Louisiana; Charleston, South Carolina; Reno, Nevada; and Houston, Texas, also made the list.

“Through the recent crisis in the housing and mortgage finance markets, the industry has learned a lot about how to better manage and predict risk,” the economists stated. “The cost of not doing so is far too high.”

“Natural hazard risk is another new frontier of risk management requiring ongoing attention,” the economists concluded.


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