This new research documents the previously-unknown fact that the quasi-mandatory U.S. flood insurance program reduces mortgage lending availability to lower-income homeowners and would-be homeowners.
It measures flood insurance mandates using FEMA flood maps, focusing on the discreet updates to these maps that can be made exogenous to true underlying flood
risk.
Reductions in lending are most pronounced for low-income and low-FICO borrowers, implying that the effects are at least partially driven by the added financial burden of insurance. The results are also stronger among non-local or more-distant banks, who have a diminished ability to monitor local borrower adherence to complicated insurance mandates.
Overall, the findings speak to the unintended consequences of (well-intentioned) regulation. They also speak to the importance of factoring in affordability and enforcement feasibility when introducing mandatory standards.
What this research doesn’t address is that the federal flood insurance tends to encourage people to build and buy homes in at-risk floodplains, thus reducing both individual and community resilience.
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