Research

Abstract: This paper shows that the timing of homeowners insurance payments determines post-disaster financial distress. Using Hurricane Irma as a case study and combining Freddie Mac loan-level mortgage data with insurer claim payments data, I find that the share of losses paid within the loss year predicts lower post-disaster mortgage delinquency,  whereas the cumulative share paid by the end of the following year does not. Instrumenting the level of an insurer’s loss-year payment share with its year-over-year change, which isolates the payment timing from local disaster severity, I find that an interquartile increase in the loss-year payment share (3.4 percentage points) reduces about one-third of the Irma-induced rise in delinquency. The effect is more pronounced among financially constrained borrowers with limited access to alternative credit. The costs of delinquency induced by late insurance payments fall primarily on borrowers through late fees on delinquency and Freddie Mac through loss mitigation programs, with little pass-through to capital-market investors. The total costs borne by these two parties substantially exceed insurers' opportunity costs of accelerating claim settlements, generating net welfare losses even if insurers pay ultimately.

Abstract: In this paper, we show that investor composition shapes both the pricing of mortgage credit risk and the extent to which prices reflect underlying credit fundamentals. Using a novel dataset of Credit Risk Transfer (CRT) securities issued by the Governmentsponsored Enterprises (GSEs), we find that mutual funds, which account for more than 55% of CRT purchases at issuance, lower CRT spreads and weaken the relationship between underlying default risk and prices. A one-standard-deviation increase in mutual fund share reduces spreads by 8.2%, translating into a 3% reduction in the credit-risk component of guarantee fees. More importantly, mutual fund participation attenuates the pass-through of expected default risk into prices, showing that investor composition affects the cost of risk transfer and the mapping between fundamentals and market prices. As policymakers weigh GSE privatization, our results show that who bears mortgage credit risk can be as important as how much risk is transferred.

Abstract:  Reinsurance protects insurer solvency but could hinder settlement efficiency. This paper uses a three-period model to show that reinsurance drains cash, tightens insurers' liquidity constraints, and introduces lag in reimbursement, all of which reduce insurers' immediate claim payments to policyholders. Using NAIC Schedule F and Schedule P data, I test these predictions and propose exogenous variation in reinsurance exposure to identify the causal effect. Solvency risk transfer does not need to be payment-speed optimal.