Environmental Hazards and Mortgage Credit Risk: Evidence from Texas Pipeline Incidents

Abstract

AbstractThis study examines the effects of pipeline hazards on credit risk using evidence from the 2005–2011 home mortgage loans in Texas. Difference‐in‐difference analyses show a permanently lower origination rate by 1.9% in the pipeline‐present areas compared to the pipeline‐free areas, which was further enlarged by 1.8% whenever pipeline incidents happened. Evidence suggests that the permanent difference in credit access reflects lenders’ concerns about collateral value and borrowers’ repayment ability. The elevated post‐incident risk perceptions indicate lenders’ aversion to environmental liabilities. Lenders’ risk management strategies differed by borrowers’ income and evolved with the tightening of the securitization market.