LOS ANGELES–Due to growing wildfire risk in California, a new study has found brick-and-mortar financial institutions are approving fewer home loans in risky areas, but online lenders are stepping up to fill the void.
The findings suggest growing concern among traditional lenders that fires in California could cause borrowers to default, as mounting losses from wildfires make it harder for residents to adequately insure their homes, according to the Washington Post.
The study, “Bluelining in Red Hot Fire Zones: Fintech and Traditional Mortgage Lending in California’s Wildfire Risk Zones,” by Tyler Haupert of NYU Shanghai, and Jesse M. Keenan of Tulane University, found the online lenders are offering better loan terms to borrowers in high-risk areas.
“The study is the latest sign that major banks are worried about how global warming could affect their balance sheets — and are taking steps to limit their exposure that could ultimately make it harder for Americans to get home loans,” according to the Washington Post.
What the Data Show
Using data on wildfire risk from the Federal Emergency Management Agency, Keenan and Haupert, an assistant professor of urban studies, looked at how traditional and online mortgage lenders were approaching census tracts in California that had been assigned very high fire-risk scores and compared them with parts of the state that are considered less vulnerable, according to the report.
The researchers analyzed home loan applications to the nation’s 650 largest lenders from 2018 and 2020 to quantify how wildfire risk was affecting approval rates and interest rate pricing, the report added.
The new study is a preprint, meaning it has been posted online but has not yet been peer-reviewed, according to the Post.
Pattern Stands Out
When comparing properties that are essentially the same but for their fire risk, one pattern stood out clearly, according to the study’s authors.
“The fintech lenders seem to treat the areas better and better as they get more risky and the traditional lenders treat the areas worse and worse — they’re more cautious to lend there,” Haupert said.
