A new report from First Street details how climate risks impact mortgage markets and housing affordability.
The First Street Foundation’s report, Climate: The Sixth ‘C’ of Credit, argues that climate risk should be integrated into mortgage credit assessments due to its growing impact on housing affordability. As climate-related disasters become more frequent and severe, properties in high-risk areas face rising insurance costs and devaluation. These financial pressures increase the likelihood of mortgage defaults, making climate risk a systemic concern for lenders, insurers, and homeowners alike.
The report details how insurance premiums have surged in vulnerable regions, pushing up monthly housing costs and making homeownership less attainable. This financial strain could lead to widespread delinquencies and foreclosures, particularly in areas prone to flooding, wildfires, or hurricanes. Without accounting for climate in credit risk models, the housing market may face increasing instability.
Key Takeaway from First Street,
CLIMATE-DRIVEN CREDIT LOSSES COULD COST BANKS BILLIONS: In a severe-weather year, projected annualized climate-driven foreclosures could inflict $1.21 billion in bank losses in 2025 (about 6.7 percent of all foreclosure credit losses) and, as weather events grow more frequent and intense, direct impacts and resulting premium increases could rise to $5.36 billion (nearly 30 percent of foreclosure losses) by 2035.
ESCALATING FLOOD RISKS AND CLIMATE-DRIVEN MACROECONOMIC CHANGES DRIVE FUTURE FORECLOSURES: Integrating First Street’s Flood Model (FS-FM) with its Macroeconomic Implications Model (FS-MIM) shows that, if lending criteria and mitigation tactics remain unchanged, climate pressures will steadily raise foreclosure rates. Flood events trigger the initial spikes, but over the next decade, soaring insurance premiums, stagnant home-price growth, and broader economic headwinds will exert sustained upward pressure on foreclosures.
As state and county leaders debate housing policy, one of the most significant factors not being discussed is vulnerability due to climate change. Maryland is particularly susceptible, with one of the longest coastlines of any state, and has an extensively forested western region. While so far the conversation has been focused on harnessing growth, long-term success will be predicated on considerations for a more dynamic climate.