Extreme weather related to climate change could cause financial damage to many U.S. homeowners and cause billions of dollars to lose to lenders, a new study found.
Foreclosures across the United States could soar 380% over the next 10 years due to floods, winds and other weather-related events, First Street, a research firm that studies the impacts of climate change, predicted in an analysis released Monday. By 2035, climate-driven events can account for up to 30% of all foreclosures by 2035, up from about 7% this year.
First Street notes that low to middle-income households are particularly vulnerable to severe weather. Much of American wealth is associated with the value of its property.
Foreclosures caused by a series of foreclosures, which are caused by extreme weather repair costs and rising insurance premiums, which not only hurts homeowners. First Street estimates lenders will lose $1.2 billion a year in 2025, up to $5.4 billion in 10 years as they are forced to absorb the cost of mortgage defaults.
Jeremy Porter, head of climate impact at First Street, told CBS MoneyWatch that the loss represents a “hidden risk” of climate change that lenders often cannot explain in their underwriting behavior. Lenders consider factors including borrower income, debt and credit scores in the issuance of mortgages, but have no potential impact on the property or how premiums can be raised.
First Street also examines how indirect factors such as rising insurance premiums have shaped foreclosure trends. Foreclosure rate nationwide increases by about 1% for every 1% increase in insurance costs of the company.
These findings are because insurance companies are increasing the cost of homeowners’ policies, in some cases, completely leaving markets across the U.S. Disaster-prone areas like California. This could cause damage to more individual homeowners hanging in extreme weather.
First Street says integrating climate risks into loan assessments can help lenders and homeowners prepare for weather-related disasters. But that could also strengthen lending conditions, putting potential home buyers at a disadvantage, Porter said.
"This will increase the price of the house. It will increase interest rates," he said.
In the next few years, communities across the United States face the greatest risk of climate-related foreclosure risks, according to First Street, are homeowners with high property value and underinsured populations. These include coastal areas that are susceptible to storm surges and hurricane winds.
For example, according to CBS MoneyWatch's analysis of First Street Data, Duval County, Florida, in the northeast corner of Jacksonville, Florida, in the northeast corner of Jacksonville, caused a credit loss of up to $900 in a year of "hard weather".
Louisiana, California and the Northeast are also expected to suffer high losses in climate-related mortgages this year. But the impact is not only felt in the coastal areas: First Street also expects extreme rainfall and river flooding, foreclosure in inland states.
“We do expect foreclosures to increase in these areas because major drivers lack insurance,” Porter said.
According to First Street, flooding events in particular may increase foreclosure rates, as the insurance coverage gap puts more people at risk of mortgage defaults.
Unlike homeowners’ insurance, flood insurance is only available to people who have federal mortgages in FEMA’s special flood hazard areas. According to data from the National Flood Insurance Plan, the policy as of August 2023 was approximately 3.1 million. However, more people may be at risk.
FEMA's 100-year flood zone map contains less than 8 million real estate properties. But First Street estimates that nearly 18 million homes are at risk of flooding. Porter said this is because the agency pours into flooding from major river channels and coastal storm surges, but it doesn’t take into account extreme precipitation.
"We already know that about half of the people at flood hazards do not map (FEMA) special flood hazard areas," he said. "So this leads to underinsurance from us nationwide, especially due to the state of the flood."
Meanwhile, discovering whether you live in an official FEMA flood zone and finding the possibility of foreclosure may make a difference. That's because people outside the flood zone usually lack insurance.
"If you don't protect yourself, then when the incident happens, it's totally on you. You end up having to pay out of change and you can be foreclosed," Porter said.
In an analysis of 29 historical flood events in 2002-2019, First Street found that the increase in foreclosure experienced by damaged properties outside those FEMA designated areas was 52% higher than that within the area.
FEMA did not respond to a request for comment on whether and how it plans to update its flood map. Completed updated flood mapping in the United States could require up to $11.8 billion, according to an estimate by the National Floodplain Managers Association