Role of Insurance, Equity, and Liquidity in Post-Flood Financial Resilience of Residential Mortgage Borrowers

Uninsured property damage from flooding can place a major strain on household finances and thereby increase the likelihood of credit events such as mortgage delinquency and default. Few studies have examined how the pre-flood financial conditions of mortgage borrowers—such as their outstanding debt, home equity, and liquidity—affect the relationship between uninsured damage and subsequent mortgage credit risk. This study investigates the effects of uninsured flood damage on the financial stability of residential mortgage borrowers in Eastern North Carolina from 1996 to 2019. We integrate property-level data on key financial variables (e.g., damage costs, property values, mortgage balances) to quantify the number of borrowers meeting the necessary preconditions for default due to liquidity constraints, negative equity, or a combination of both factors. Over the 24-year study period, we evaluate the financial repercussions of seven federally declared disasters, including Hurricanes Florence, Matthew, and Floyd. These events caused $6.5 billion in flood damage within the study area, with an estimated $5.1 billion (79%) being uninsured, and repeatedly flooded properties accounting for a disproportionate share of this total. Mortgages at risk of default due to uninsured flood damage generated over $185 million in financial risk to borrowers (measured as lost equity after default) and over $244 million in risk to lenders (measured as unpaid principal lost given default), with a large proportion of these risks stemming from recently originated loans on lower-valued properties. The analysis highlights the role of negative equity and cashflow problems in driving credit risk among flood-affected mortgages and quantifies the magnitude of potential losses held by borrowers and lenders. By providing highly resolved mapping on which households are most vulnerable to mortgage default in the aftermath of a flood, these results may inform the nature and targeting of interventions to enhance the disaster resiliency of the U.S. housing finance system.