Adverse Selection and Climate Risk
This Fannie Mae working paper investigates whether mortgage lenders change their loan origination, approval, and securitization practices in areas affected by major hurricanes. In summary, the authors found no evidence of risk transfer or adverse selection in the data examined. This does not mean, however, that the hypothesized risk transfer and adverse selection could not occur in the future. Increased frequency and magnitude of extreme climate events makes the assessment of risk easier going forward and increases the incentives to transfer it to other market participants. Therefore, the authors conclude that there is a clear need to design and implement mechanisms and procedures that monitor for potential risk transfer going forward.
Click here to read the Working Paper.