A new study indicates that the escalating frequency and severity of extreme weather events are poised to significantly impact the U.S. mortgage market. The report suggests a rise in foreclosures and substantial financial losses for mortgage lenders, a trend that could also influence future mortgage rates.
Escalating Risk for Mortgage Lenders
While the financial strain of natural disasters on the insurance industry is well-documented, a new report from climate risk analytics firm First Street highlights the growing vulnerability of mortgage lenders. The study projects that mortgage lenders could face an estimated $1.2 billion in credit losses from severe weather events in 2025, with this figure potentially surging to $5.4 billion by 2035. States like Florida, Louisiana, and California are anticipated to account for a substantial portion (53%) of these climate-related mortgage losses this year. The analysis suggests that physical hazards are already eroding fundamental assumptions in loan underwriting, property valuation, and credit servicing, introducing systemic financial risk to mortgage markets.
The Erosion of Insurance Protection
The report warns that the protective layer traditionally offered by insurance against natural disasters is becoming less robust. Factors such as increasing insurance costs, reductions or cancellations of coverage, and persistent gaps in flood insurance coverage are shifting more of the financial burden onto homeowners. This increased burden, in turn, elevates the risk of mortgage defaults.
Flood Impact on Foreclosures
First Street's research identifies floods as the primary driver of disaster-related foreclosures. Following flood events, foreclosures among damaged homes have been observed to surge by 40%. This is largely attributed to the common lack of flood insurance, as traditional homeowners' insurance policies typically do not cover flood damage. In contrast, properties affected by wildfire or hurricane wind damage show a lower likelihood of foreclosure compared to undamaged properties after an extreme weather event. This difference is often due to insurance payouts, which are frequently sent directly to lenders, covering repair costs or outstanding mortgage balances. However, the broader trend of rising insurance premiums to offset increased payouts contributes to overall financial strain on homeowners, potentially leading to more defaults. The study notes that for every 1 percentage point increase in annual homeowners insurance premiums, foreclosure rates nationwide rise by 1.05 percentage points.
Long-Term Financial Implications
The findings arrive amidst a significant increase in the frequency and cost of natural disasters. Data from the National Oceanic and Atmospheric Administration (NOAA) indicates that 2024 saw 27 individual weather and climate disasters causing at least $1 billion in damages, close to the record of 28 in 2023. First Street estimates that the annual costs from climate-related events have escalated by 1,580% over the past four decades. This surge is fundamentally altering how risk is assessed for households and financial institutions. Consequently, the report suggests that climate risks could begin to drive mortgage rates higher, particularly in areas most susceptible to disasters, as lenders respond to increased risk by demanding higher interest payments. The study concludes that climate risk associated with the property itself is becoming a core determinant of creditworthiness, marking a structural shift in financial risk assessment.
