Debts and Disasters
Five feet of flood water surrounds a home in the aftermath of Hurricane Katrina
Twelve years ago this month, Hurricane Katrina landed in New Orleans. Eighty-five percent of the city flooded, and today, parts of the city are still feeling the effects.
The hurricane caused approximately $108 billion in property damage. With this much damage, it is reasonable to expect that homeowners would go into debt as they made repairs.
However, the opposite may be true. In a new paper in the American Economic Journal: Economic Policy, authors Justin Gallagher and Daniel Hartley analyze household finance after Hurricane Katrina. As shown in Figure One, they find that people in the most flooded areas actually lowered their debt, primarily by paying off their mortgages.
Figure 1 from Gallagher and Hartley (2017)
Homeowners may have decided to pay off their mortgages and move if they realized that buying a new house was cheaper than making repairs. Another possibility is that mortgage companies pressured homeowners into using the money from their flood insurance to pay off their mortgages.
Flood insurance claims checks are written to both the owner and the mortgage company. Although the owner can use the money however he wants, he still needs the company’s signature to get it, creating an opportunity for lenders to use pressure tactics.
Regardless of which explanation is more correct, this remains a rare case in which paying down debt may not represent a positive change.