The Impact of the BP Oil Spill on Residential Mortgage Lending and Its Mechanisms

ABSTRACT This paper employs the BP oil spill as a quasi‐natural experiment and examines its effects on residential mortgage lending in the affected Gulf coast areas. We construct a unique dataset by using information from the Shoreline Cleanup Assessment Technique program and mapping those observations to the Home Mortgage Disclosure Act lending dataset. Our difference‐in‐differences estimation results show that the denial rate of mortgage applications rose by nearly 2 percentage points as a result of the oil spill, whilst accounting for various fixed effects at the lender and census tract levels. We also find that the collateral value channel played a crucial role in the propagation mechanism of the oil spill and its impact on the lending activities of financial institutions. Furthermore, depending on lenders' funding models, the oil spill triggered a heterogeneous lending response, resulting in a more pronounced lending contraction for institutions with higher exposure to funding through securitization.