Whither Weather? : High Temperature, Climate Change and Mortgage Default

We investigate the relationship between temperature and residential mortgage default using fine-scale weather information and comprehensive loan performance data. Conditional on a rich set of default risk controls and fixed effects, we identify a significant high temperature-mortgage default relation. An additonal day of mean temperatures above 90oF (32.2oC) in each month for the last 12 months is associated with a 3.2% and 3.5% increase in the probability of 30-day delinquency and foreclosure, respectively. To explain the effect, tests are specified to differentiate between three plausible channels: behavioural-psychological, income-liquidity, and rational belief updating. Evidence favors the belief updating channel as dominant. All three channels help explain the link between high temperature and 30-day delinquency, but, given the long lags from delinquency to foreclosure and the pronounced costs, belief updating best explains the effects of high temperature on foreclosure outcomes. High temperatures paired with higher rates of default indicate that borrowers mark down their own estimate of house value, perceiving a mismatch between their current home-location and their preferred home-location. Our findings have direct monetary and bank regulatory policy implications