Climate change could drive surge in foreclosures and lender losses, new study finds

Extreme weather linked to climate change could spell financial ruin for many American homeowners and lead to billions in losses for lenders, a new study finds. 

First Street, a research firm that studies the impact of climate change, projects in an analysis released Monday that foreclosures across the U.S. caused by flooding, wind and other weather-related incidents could soar 380% over the next 10 years. By 2035, climate-driven events could account for up to 30% of all foreclosures by 2035, up from roughly 7% this year. 

Low- to moderate-income households are particularly vulnerable to the effect of severe weather on their homes, First Street noted. Much of Americans’ wealth is tied up in the value of their properties.

A cascade of foreclosures, driven by the mounting costs of repairs and rising insurance premiums stemming from extreme weather,  wouldn’t only hurt homeowners. First Street estimates lenders will lose $1.2 billion a year in 2025 — and up to $5.4 billion in 10 years — as they are forced to absorb the cost of mortgage defaults. 

Such losses represent the “hidden risks” of climate change that lenders often fail to account for in their underwriting practices, Jeremy Porter, head of climate implications at First Street, told CBS MoneyWatch. Lenders consider factors including a borrower’s income, debt and credit score in issuing mortgages, but not the potential impact of extreme weather on a property or how it could raise premiums.

First Street also looked at how indirect factors, like rising insurance premiums, are already shaping foreclosure trends. For every 1% increase in insurance costs, the firm projects a roughly 1% increase in the foreclosure rate nationwide.

The findings comes as insurers are jacking up the cost of homeowners policies and in some cases exiting markets around the U.S. altogether, leading to spottier coverage in disaster-prone areas like California. That could leave more individual homeowners on the hook for damage from extreme weather. 

First Street said integrating climate risk into loan assessments could help lenders – and homeowners – be better prepared for weather-related disasters. But it could also tighten lending conditions, Porter said, putting potential homebuyers at a disadvantage. 

“It’s going to increase the price of homes. It’s going to increase interest rates,” he said. 

Where climate foreclosures could rise

According to First Street, the communities around the U.S. at greatest risk for climate-related foreclosures in the years to come are densely populated areas with high property values and large numbers of underinsured homeowners. That includes coastal areas vulnerable to storm surge and hurricane winds.

For example, Florida’s Duval County in the northeastern corner of the state, home to the city of Jacksonville, could see up to $60 million in credit losses resulting from 900 foreclosures in a “severe weather” year, according to CBS MoneyWatch’s analysis of First Street’s data. Florida is home to 8 of the top 10 counties with the highest projected credit losses due to extreme weather, the data shows.

Louisiana, California and swaths of the northeast are also projected to see high climate-related mortgage losses this year. But the impact won’t just be felt in coastal areas: First Street also expects extreme rainfall and riverine flooding to drive up foreclosures in inland states.

“We do expect foreclosures to rise in those areas because the predominant driver is a lack of insurance,” Porter said.

According to First Street, flooding events in particular is likely to drive up foreclosure rates, as gaps in insurance coverage put more people at risk of defaulting on their mortgages. 

Unlike homeowners insurance, flood insurance is only required for people who have federally-backed mortgages in FEMA’s Special Flood Hazard Areas. As of August 2023, that amounted to roughly 3.1 million policies, according to National Flood Insurance Program data. But far more people could be at risk.

FEMA’s 100-year flood zone maps include just under 8 million properties. But First Street estimates that nearly 18 million homes are at risk of flooding. That’s because while the agency takes flooding from major river channels and coastal storm surge into account for its maps, it does not consider extreme precipitation, Porter said. 

“We already know that about half the people with significant flood risk aren’t mapped into [FEMA’s] Special Flood Hazard Area,” he said. “So it leads to a state where we have a lot of underinsurance across the country, in particular from flooding.”

Meanwhile, whether or not you live in an official FEMA flood zone can make a difference when it comes to the likelihood of foreclosure, First Street found. That’s because people outside flood zones often lack insurance.

“If you don’t protect yourselves, then when the event does occur it’s completely on you. You end up having to pay out of pocket and you may go into foreclosure,” Porter said.

In an analysis of 29 historical flood events from 2002-2019, First Street found that damaged properties outside of those FEMA-designated zones experienced foreclosure increases at an average of 52% higher than properties inside the zones. 

FEMA did not respond to a request for comment on if and how it plans to update its flood maps. According to one estimate by the Association of State Floodplain Managers, it could take up to $11.8 billion to complete updated flood mapping in the U.S. 

Scott Pham

contributed to this report.