Flood risks to the financial stability of residential mortgage borrowers: an integrated modeling approach

Abstract. Property damage from flooding can destabilize household finances, increasing the risk of mortgage delinquency, default, and foreclosure. Few studies have examined how pre-flood financial conditions (i.e., insurance, equity, and liquidity) mediate the relationship between damage exposure and mortgage default risk. Here, we evaluate the impact of uninsured damage on residential mortgage borrowers' financial conditions over a series of floods in North Carolina from 1996–2019. Our framework estimates key financial variables (e.g., damage cost, property value, mortgage balance) to identify borrowers exhibiting financial conditions indicative of default, including liquidity constraints, negative equity, or both in combination. The floods evaluated generated $4.0 billion in property damage across the study area, of which 66 % was uninsured. Among flood-affected mortgage borrowers, only 48 % had insurance, and 32 % lacked sufficient income or collateral to finance repairs through home equity-based borrowing, placing them at an elevated risk of default. These findings shed light on the contribution of negative equity and cashflow problems to default risk among flood-affected mortgages. By identifying which households are most vulnerable to mortgage default following a flood, these results can inform the nature and targeting of interventions to improve the financial resilience of flood-prone U.S. households.