Feeling the Heat: Mortgage Lending and Central Bank Options

Baranyai, Eszter and Banai, Ádám (2022) Feeling the Heat: Mortgage Lending and Central Bank Options. FINANCIAL AND ECONOMIC REVIEW, 21 (1). pp. 5-31. ISSN 2415-9271

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Abstract

Extreme heat periods due to the changing climate are having a negative impact on many areas of the economy. In our study, we look at how much US mortgage lending is originated in the areas that are most vulnerable to future heat waves, and what central bank and supervisory authority actions could mitigate the resulting risk. From our results, we see that proportionally more lending flows into the areas that are likely to be most exposed to heat in the future. Population and economic output are relatively higher in these areas, and thus climate risk is less of a factor in lending decisions. However, lenders reject proportionately slightly more mortgage applications in the counties that are expected to be the hottest. Central bank and supervisory authority measures to support climate objectives are therefore of key importance. These could include, for example, central bank asset purchase programmes to support sustainable construction, especially in areas vulnerable to climate change, or the development of collateral management along similar lines. Coordination between the different authorities is also important because of the limitations of central bank actions.

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