A property sign stands in front of a burnt grounds following the Palisade fire in the Pacific Palisades area of Los Angeles, California, USA on January 13, 2025.
Mike Blake | Reuters
Mortgage buyers know that your finance lender wants to dive to determine your credit cult. But here is a new factor: climate change.
Given how quickly climate disasters are increasing both in frequency and the resulting costs, lenders are now paying much more attention to how those costs collide. Insurance companies are also struggling to keep up, often withdrawing from areas where risk is more likely to occur, making losses even more rapid. Additionally, FEMA is in liquidity under the Trump administration, with both staff cuts and potential disaster funding.
Therefore, according to a new report from First Street, a climate risk assessment firm, climate, along with consumer debt, income and collateral, has become an increasingly important consideration in assessing credit score risk. Risks include floods, wildfires and wind.
The report states that annual climate-driven foreclosure forecasts in severe weather years could result in $1.21 billion in bank losses this year, or 6.7% of all foreclosure credit losses. Just ten years later, as weather events grow more frequently and more destructive, these credit losses account for nearly 30% of foreclosure losses, potentially increasing to $5.36 billion.
Once lenders begin to incorporate climate into underwriting, consumer credit scores can fall or rise depending on property risk. The former has a higher borrowing cost. The study notes that today’s lender losses come in only three states, primarily California, Florida and Louisiana.
“The mortgage market is currently at the forefront of climate risk,” said Jeremy Porter, director of First Street’s climate impact. “Our modelling shows that physical danger already erodes basic assumptions of loan underwriting, property valuation and credit services.
Aerial view of a flooded residential street after heavy rains in Fort Lauderdale, Florida on December 18, 2024.
Joe Raedle | Getty Images
When property floods during extreme weather events, the rate of foreclosure is higher than unimposed neighbors. According to the report, it has historically led to an average 40% surge in foreclosures after influx among damaged homes.
Consumers in high-risk regions like Florida’s coast are already seeing a big jump in premiums due to the recent storm. The first street report was able to link these increases to increased foreclosures. Some homeowners simply can’t afford the increase, and are leaving again and leaving lenders on the hook.
While some lenders may require flood insurance for their homes on government-designated flood plains, overall lenders do not consider the impact on future climate change underwriting models. Fannie May, who is not a lender and funds the majority of the mortgage market, had been considering doing this two years ago, but has yet to announce any changes.
Annual costs for climate-related disasters have increased by 1,580% over the past 40 years, according to a First Street report examining the National Oceanic ant Atmospheric Administration’s $1 billion weather and climate disaster database. With the Trump administration’s staffing cuts, that resource will no longer be updated.
The increased costs are not only due to increased storm severity, but also increased inflation and even increased real estate development in higher populations and higher risky regions. Americans love the coast, and in most areas they pay more and more premiums to live there.
However, these climate-related costs and the resulting risk jumps have similar impacts on households, financial institutions and investment portfolios.
“There is currently a substantial amount of credit loss risk associated with climate, hidden from traditional credit loss models. This not only has a systematic effect on the mortgage market from both direct losses, but also reports indirect effects such as increased insurance costs,” Porter added.
