Climate disasters could lead to $5.4 billion in foreclosures by 2035, up sharply from $1.2 billion this year, driven by an escalating insurance crisis and the increasing frequency and severity of events, including flooding.
This is according to First Street’s 13th National Risk Assessment, which analyzes the relationship between physical climate risk and mortgage defaults. Costs related to climate-related events have surged 1,580% over the past 40 years, fundamentally altering risk assessment for households, financial institutions and investment portfolios by eroding income and driving losses, the firm said. Extreme weather damage has consistently been the costliest category of homeowners insurance claims, and mortgage lenders have depended on this safety net as a first line of defense against loan losses. As such, insurance has been required as a condition of mortgage approval.
However, that protective layer has been fraying as U.S. disaster costs have climbed exponentially, said First Street. Access to wind and wildfire coverage has been tightening and a persistent gap in flood insurance leaves many homeowners exposed.
“As the insurance industry shifts the growing costs of climate disasters onto homeowners, the financial stability of borrowers and the performance of their mortgages are increasingly at risk,” said the report. “In the most severe cases, this escalating burden can ultimately lead to foreclosure.”
First Street said climate has become the sixth ‘C’ of credit risk, joining character capacity, capital, condition and collateral. This year, climate-driven foreclosures account for 6.7% of all foreclosure credit losses. By 2035, they could account for nearly 30% of foreclosure losses, the firm said.
Insurers reported $546.2 billion in weather-related losses in 2023, which has led to increased premiums and insurers leaving high-risk areas, resulting in insurance gaps and increased borrower exposure to financial and physical climate impacts.
“As insurance becomes more expensive and less accessible, households with limited savings (personal savings at 4.6% of disposable income in 2024) are forced to absorb more climate risk,” said the report. “This shift increases the chances of missed payments and loan defaults, while also decreasing real estate investment performance due to reduced demand and declining property values.”
Floods are the leading driver of foreclosure among perils, the report said. Properties flooded in an extreme weather event face a 0.29-percentage-point higher foreclosure rate than nearby, unflooded homes, which historically translates to an average 40% surge in post-flood foreclosures among damaged homes across events analyzed.
Meanwhile, Properties with wildfire or hurricane wind damage following an extreme weather event are 1.46 and 0.41 percentage points less likely to foreclose relative to properties undamaged by the event, respectively, because insurance payouts — often sent directly to lenders — cover repairs and outstanding balances. As insurers raise rates to offset increased payouts, the cost burden shifts back to homeowners, said First Street. Every 1% increase in annual homeowners insurance premiums is associated with a 1.05% rise in foreclosure rates nationwide, according to First Street.
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