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Federal Disaster Loan Program

Introduction

The Federal Disaster Loan Program (FDL) is the largest U.S. program to offer loans to households and businesses following extreme weather events. Since its inception in 1953, it has lent out roughly 60 billion dollars in recovery loans. Borrowers must spend the loan to repair uninsured damages to their property that were incurred because of a flood, hurricane, wildfire, or any other kind of extreme weather event.

FDL aims to set a market interest rate that reflects the prevailing 30-year-fixed-rate-mortgage, but the program only adjusts their rate quarterly. Collier and Ellis (2022) employ a fuzzy regression discontinuity design to study 145 weather events between 2006 and 2018 that occur within a 4-week window around a quarterly FDL rate adjustment. By observing take-up rates on either side of the adjustment, the paper estimates an average semi-elasticity of -0.26, meaning that a 1 pp increase in interest rates relative to the prevailing 30-year-fixed-rate-mortgage decreases uptake of FDL loans by 26 percent. The paper uses these results to estimate the MVPF of disaster recovery loans.

MVPF = 1.5

Net Cost

The direct costs of the program to the government consists of the administrative costs ($2.31B) and subsidy costs ($1.25B), for a total of $3.56B in costs incurred from the FDL program (approximately $12,480 per borrower).

$3.6B Net Cost

Willingness to Pay

The paper uses their estimated elasticity to derive a demand curve for disaster recovery loans. By using acceptance rates to estimate the total quantity loaned and interest rates to estimate prices, the paper is estimates consumer surplus—the willingness to pay—as the difference in the estimated amount consumers would have been willing to pay for that quantity loaned minus the amount actually paid. The paper estimates total consumer surplus derived from the program to be $5.44B total or approximately $19,070 per borrower.

$5.4B WTP

MVPF Summary

The estimated MVPF of the Federal Disaster Loan Program is $5.44B/$3.56B = 1.53.

1.5 MVPF

References

Benjamin Collier and Cameron Ellis (2022). A Demand Curve for Disaster Recovery Loans. Working Paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3839044

Policy Features

Category: Social Insurance
Beneficiary Type(s): Adults
Country of Implementation: United States
Empirical Method: Regression Discontinuity
Research Type: Primary
Peer Reviewed: No
MVPF Publication Link: papers.ssrn.com/sol3/papers.cfm?abstract_id=3839044