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Climate change poses new risks for real estate assets. Given that themajority of home buyers use a loan to pay for their homes and the majority ofthese loans are purchased by the Government Sponsored Enterprises (GSEs), it isimportant to understand how rising natural disaster risk affects the mortgagefinance market. The climate securitization hypothesis (CSH) posits that, in theaftermath of natural disasters, lenders strategically react to the GSEsconforming loan securitization rules that create incentives that foster bothmoral hazard and adverse selection effects. The climate risks bundled into GSEmortgage-backed securities emerge because of the complex securitization chainthat creates weak monitoring and screening incentives. We survey the recenttheoretical literature and empirical literature exploring screening incentiveeffects. Using regression discontinuity methods, we test key hypothesespresented in the securitization literature with a focus on securitizationdynamics immediately after major hurricanes. Our evidence supports the CSH. Weaddress the data construction issues posed by LaCour-Little et. al. and showthat their concerns do not affect our main results. Under the current rules ofthe game, climate risks exacerbates the established lemons problem commonlyfound in loan securitization markets.

Mortgage Securitization Dynamics in the Aftermath of Natural Disasters: A Reply