Disaster Loans Research Articles

Valuing Federal Disaster Loans for Investment

MARK POTTER is an assistant professor of finance at Babson College in Babson Park, Massachusetts. T he Small Business AdministraŽ . tion SBA makes loans to owners of businesses and residences damaged in formally declared disasters, such as floods or hurricanes. Although these loans are now held within the SBA, the President’s 1999 budget submission proposes that SBA loans be sold to private investors. Anticipating new markets for these types of loans, this article takes a fresh look at government loan valuation. Using data on over 130,000 flood and hurricane disaster loans disbursed between 1980 and 1990, we estimate loan write-offs and early repayments using a discrete proportional hazards model. Then, using a stochastic interest rate model, we simulate loan termination probabilities to calculate the expected present value of the loans’ cash flows. Our analysis indicates an implied subsidy rate in the neighborhood of 26% for the 1990 loan cohort. Adding administrative costs and transactions fees to this rate defines the ‘‘true’’ cost to the government and, therefore, to private investors, of this particular disaster loan program. In the following section, the SBA’s Disaster Loan Program and related research in mortgage loan valuation is discussed. The data and methodology, including details of the valuation of disaster loans, are then presented. Empirical results as well as loan valuation simulations follow. We conclude with a discussion of the implications of our results for potential investors to these and other similar U.S. government loan programs.

Valuing Federal Disaster Loans: A Stochastic Model Approach

Between 1986 and 1990, the Small Business Administration made approximately $800 million in hurricane and flood disaster loans. The President's 1999 budget submission proposes that these loans be sold to private investors. Using data on over 130,000 disaster loans, and employing a stochastic interest rate model, we estimate the probability of a loan prepaying or being written off. We find that interest rate subsidy costs are significant components of the overall subsidy rate - for every dollar in loans granted, the government recovers between seventy and seventy-four cents, in present value terms. The valuation approach used in this paper can be applied to other government programs that repackage and sell loans to private investors.

Business Impacts of the Northridge Earthquake

The Northridge earthquake of 17 January 1994, killed 57 people and injured an estimated 10,000 persons. The earthquake is the most costly disaster in U.S. history, in terms of dollar loss; costs continue to rise as more damage is uncovered, repairs are made, and disaster‐related claims are paid out. Recently‐issued government estimates place the losses due to direct earthquake damage at approximately $25 billion (Governor's Office of Emergency Services and Federal Emergency Management Agency, 1996), and researchers who are tracking Northridge‐related losses believe ‘it is quite possible that total losses, excluding indirect effects, could reach as much as $40 billion’ (Eguchi, et al, 1996)The number of households and businesses that were affected by the earthquake far exceeded the size of the victim population in other recent major disasters in the U.S., including Hurricane Hugo in 1989 and Hurricane Andrew in 1992, and the assistance effort that was launched was the largest ever undertaken for a U.S. disaster. By the end of 1995, 681,710 applications for state and federal assistance had been received, which was more than double the amount filed for any other single disaster event (Governer's Office of Emergency Services and Federal Emergency Management Agency, 1996). Applications for the housing assistance programs operated by the Federal Emergency Management Agency totalled well over half a million, and nearly 200,000 households applied to the U.S. Small Business Administration (SBA) for loans to rebuild or repair their homes. Additionally, approximately 39,000 businesses applied to the Small Business Administration for disaster loans (EQE International, 1995).This paper focuses on the immediate and longer‐term impacts the earthquake had on businesses in the Greater Los Angeles region. The data reported here are based on a survey that the Disaster Research Center, at the University of Delaware, conducted with a representative, randomly‐selected sample of businesses in the cities of Los Angeles and Santa Monica, two jurisdictions that were particularly hard‐hit by the earthquake. The material presented here is primarily descriptive. The goal of this paper is not to develop or test complex analytic models, although the paper does refer to other more quantitative analyses that have been performed on these data. Rather, the objective is to outline for readers empirical findings on the various ways that the earthquake affected the operations and viability of businesses on the impact area. Few studies exist that document the range of impacts that disasters can have on businesses and business sectors, and even fewer are based on detailed data from large representative samples.The paper addresses the following research questions:(1) What direct impacts and losses did businesses experience in the earthquake?(2) In what ways did the earthquake affect the operations of the businesses studied? If they experienced business interruption, why were they forced to close? What other kinds of problems did business have to cope with following the earthquake?(3) What earthquake preparedness measures had businesses undertaken prior to the disaster, and what have they done subsequently to prepare? and(4) To what extent have business operations returned to pre‐earthquake levels, and which businesses appear to be experiencing the most difficulty with recovery?

Tests of Alternative Theories of Firm Growth

This study examines the relationships among firm growth, firm size, and firm age for a sample of manufacturing firms between 1976 and 1982. Firm growth is found to decrease with firm age and firm size. These findings are robust to alternative assumptions concerning the effects of sample censoring and the functional form of the growth relationship. The inverse growth-age relationship is consistent with a theory of firm learning proposed by Boyan Jovanovic while the inverse growth-size relationship is inconsistent with a number of theories that assume or imply Gibrat's law. Copyright 1987 by University of Chicago Press.

Flood Insurance or Disaster Loans: An Economic Evaluation

AbstractAlternative federal flood disaster assistance programs are evaluated through an economic comparison of flood insurance and disaster loan programs. The distribution of costs, benefits, and program transfers, both private and public, are simulated over time and are analyzed to determine the sensitivity of program performance to specific program parameters. Empirical results demonstrate that both programs provide adequate levels of protection at approximately equivalent costs. Variations in premium and interest rate subsidies have major effects on the distribution of total costs between the public and private sectors.