How climate change screws up mortgage markets
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Extreme weather worsened by climate change and insurance market gaps together create systemic jeopardy for mortgage providers, the risk modeling group First Street finds.
Why it matters: Its granular new report is the "first national-scale analysis of the relationship between physical climate risk and mortgage defaults," First Street said.
Threat level: "Climate-driven foreclosures" could bring $5.36 billion in annual bank credit losses by 2035 during "severe weather years" — nearly 30% of all foreclosure losses, the report finds.
- Climate change can worsen many kinds of threats, such as wildfires. But flooding is the "leading climate driver of foreclosure risk," as many insurance policies don't cover it.
- FEMA's method for creating its Special Flood Hazard Areas, where insurance is required, leaves out millions of properties facing risk, First Street said.
Friction point: Another problem is that rising premiums are becoming an economic burden for more homeowners, which itself boost chances of missed mortgage payments or loan defaults.
- "The one thing proven to prevent foreclosures is getting so expensive that it is causing foreclosures," states the report.
- While wind and wildfires are typically covered, that insurance is getting costlier.
Zoom in: Florida, Louisiana, and California are projected to account for 53% of all climate-related mortgage losses in 2025, First Street finds.
What we're watching: The report calls for financial institutions and regulators to integrate this kind of data into credit models and risk management.
- While Trump 2.0 regulators are backing away from climate, First Street's Jeremy Porter said the group's data is already used by parties like Fannie Mae and Freddie Mac, as well as various Wall Street giants and mid-sized banks.
- "Their questions to us were actually the impetus for the research," he said via email.
"Ultimately, the climate folks at financial institutions see climate as an emerging risk and are pivoting from integrating the data for regulatory compliance to thinking about how the impacts might link back to mortgage and investment performance," Porter, head of climate implications at First Street, tells Axios.
The bottom line: "Mortgage markets are now on the front lines of climate risk," Porter said in a separate statement alongside the report.
