Adverse Selection and Climate Risk: A Response to Ouazad and Kahn (2022).

This article critically examines the findings of Ouazad and Kahn (2022) regarding mortgage lenders’ behavior following major hurricanes, specifically their claim that lenders increase the origination and securitization of loans eligible for Government-Sponsored Enterprises (GSEs) acquisition, implying adverse selection. The authors identify two key data issues in the original study: incorrect use of Federal Housing Finance Agency (FHFA) conforming loan limits by county and year, and improper comparison of loan amounts to these limits due to rounding discrepancies. Correcting either issue reverses the original results, and correcting both nearly eliminates statistically significant effects, with an independent replication finding no evidence of lenders transferring climate risk through altered loan origination or securitization. While these corrections challenge the original conclusions, the authors affirm the importance of the Ouazad and Kahn model as a framework for testing adverse selection and recommend ongoing monitoring of lending practices in climate risk areas given increasing extreme weather events.