Climate Surge Threatens US Mortgage Stability with Rising Foreclosures

First Street's 13th National Risk Assessment highlights a stark increase in climate-related financial risks impacting the U.S. housing and mortgage markets. The report reveals that costs from climate-related disasters have increased by 1,580% over the last 40 years, significantly influencing risk models for lenders, insurers, and investors. This surge in disaster frequency and severity, including flooding, is draining income sources and causing higher losses for households and financial institutions alike.

Homeowners insurance, a critical safeguard for mortgage lenders against property damage and loan defaults, is under pressure as disaster costs soar. Insurers are tightening access to wind and wildfire coverage while a longstanding gap in flood insurance coverage persists, exposing homeowners to significant risks. Rising insurance premiums and market withdrawals from high-risk regions worsen borrower vulnerability, contributing to increased foreclosure rates linked to climate events.

The assessment underscores climate risk as an emerging key factor in credit evaluations alongside traditional considerations like character and collateral. Climate-driven foreclosures currently comprise 6.7% of credit losses but may grow to nearly 30% by 2035. Flooding stands out as the primary cause of climate-related foreclosures, with affected properties experiencing a substantial increase in default rates post-event.

Conversely, properties damaged by wildfires and hurricanes tend to have lower foreclosure rates due to insurer payouts that facilitate repairs and protect lenders' interests, although the rising costs of premiums redirect financial pressure back to homeowners. The report also identifies a direct correlation between rising homeowners insurance premiums and foreclosure rates, highlighting an intricate feedback loop where insurance market dynamics elevate financial risk for property owners.

Amid a backdrop of limited household savings and escalating insurance expenses, borrowers face higher barriers to maintaining mortgage payments and preserving property values. This evolving landscape challenges the resilience of residential real estate and prompts heightened scrutiny of insurance availability, affordability, and regulatory frameworks shaping the future of property financing in climate-vulnerable regions.