FINTECH THRUST SEMINAR | The Response of Mortgage Supply to Expected Flood Insurance Lapses
The Response of Mortgage Supply to Expected Flood Insurance Lapses
Abstract:
Flooding is the costliest natural disaster in the US. To protect collateral, many mortgage borrowers are legally required to maintain flood insurance. However, lax enforcement leads to frequent policy lapses. This paper hypothesizes that lenders, facing high monitoring costs, provide credit contingent on borrowers' insurance incentives. Exploiting exogenous premium rises ($266 annually) which disincentivize insurance take-up, I find lenders increase mortgage denial rates dramatically by 0.8pp. As a comparison, lowering income by $266 has an effect of only 0.01pp. Total applications and borrower characteristics remain unchanged, refuting demand-side explanations. Evidence suggests lenders internalize ex-post monitoring costs into ex-ante credit restrictions.
Zhongchen Hu is currently an Assistant Professor of Finance at the Chinese University of Hong Kong, Shenzhen (CUHKSZ). He joined CUHKSZ in 2021 after obtaining his PhD in Finance from the London School of Economics (LSE). His research focuses on corporate finance, household finance, climate finance, labor and finance, entrepreneurship, and venture capital. His work has been published in leading finance journals, including the Review of Financial Studies and the Journal of Financial Economics. Zhongchen also received the NSFC Excellent Young Scientist Fund and several noteworthy awards, such as the RFS Best Paper Award in Behavioral Finance, Ming Kang Ming Kang Young Researcher Award, and WFA PhD Award for Outstanding Research. Prior to his doctoral studies, Zhongchen earned his MSc from LSE and his BSc from Nanyang Technological University, where he received the Antoine Faure-Grimaud Prize and the Lee Kuan Yew Gold Medal for outstanding academic performance.