Natural Disaster Risk and Residential Mortgage Lending Standards

We study how bank residential mortgage lending standards are affected by risks to the local economy from natural disasters. We find that banks tighten lending standards in disaster-hit counties, suggesting that lenders are more cautious in these locations since environmental disasters can increase the long-term risks to the local economy. Tighter bank lending standards can lower access to mortgage credit and have negative consequences for the housing sector. On the other hand, we do not find any statistically significant change in the lending standards of banks that specialize in subprime loans. Finally, we show that banks tighten lending standards in those disaster-hit counties where there is a high belief about the negative effects of climate change; this indicates that disasters impact lending standards through increasing existing disaster risk awareness among lenders, whereas, lenders do not update their risk assessment in low belief counties.