Real Estate

Bank balance sheet lending is commonly viewed as the predominant form of lending. We document and study two margins of adjustment that are usually absent from this view using microdata in the $10 trillion U.S. residential mortgage market. We first document the limits of the shadow bank substitution margin: shadow banks substitute for traditional “deposit-taking” banks in loans which are easily sold, but are limited from activities requiring on-balance-sheet financing.

This paper exploits strict flood insurance coverage limits and staggered flood map updates to show that mortgage lenders offload flood risk to the government through flood insurance contracts, and to under-insured households through higher down payments. Lender risk management leads delinquency rates to equalize inside and outside of flood zones. The combination of insurance requirements and credit rationing shift the composition of mortgages in flood zones towards richer and higher credit quality borrowers.