November seminar: The roles of energy efficiency and extreme weather for credit risk of residential mortgage lending

The seminar addressed significant findings from two articles that focused on the effects of energy efficiency and extreme weather in mortgage credit risk. Both examined at a one-of-a-kind micro-level data set on home mortgages in the United Kingdom. According to the findings reported in the first study, mortgages secured by energy-efficient properties are less commonly in arrears than mortgages secured by inefficient properties. As a result, the presentation indicated that energy efficiency is a significant predictor of mortgage defaults.

Key findings from a second paper were also used to supplement the presentation. It investigated whether lenders take extreme weather events into account. It was determined that lender values do not "mark-to-market" in response to local price reductions. As a result, valuations are skewed to the upside. Second, lenders do not modify interest rates or loan amounts to compensate for the valuation bias. Third, low-credit-risk borrowers self-select into high-risk flood zones.