Flooding the leading driver
An elderly woman is rescued from her flooded Hillsborough County home following Hurricane Milton’s landfall. Courtesy, Hillsborough County S.O.
Rapidly climbing U.S. disaster costs tally more than just immediate property damage; they are becoming a huge burden on the mortgage market, leading to an increase in foreclosures. According to First Street Foundation’s 13th National Risk Assessment and its mortgage default analysis, a lack of affordable and available insurance in high-risk areas is leaving borrowers increasingly vulnerable to climate-driven losses they cannot afford. This means that lenders could see $1.2 billion in lender losses in a severe weather year, projected to increase to a whopping $5.4 billion by 2035. Overall, flooding events have become the frontrunner of post-disaster foreclosures, especially outside FEMA Special Flood Hazard Areas (SFHAs) where flood insurance is not mandatory – culminating in foreclosure increases averaging 51.8 percentage points more than similar, damaged houses in SFHAs.
Effectively, this means that many institutions are underestimating the impact of climate on incurred risk, leading First Street to dub climate “The 6th C of Credit,” adding to the list of traditional metrics: character, capacity, capital, collateral, and conditions. The growing financial burden of extreme weather has caused a widespread increase in premiums and many insurance carriers retreating from high-risk areas, particularly flood-prone properties where protection gaps are becoming increasingly apparent: average NFIP claims are up 223% since the early 2000s, without a change in the $250K structural limit. Flooded properties face a 0.29 percentage-point higher foreclosure rate than unflooded homes nearby, which, according to the historical data, means an average 40% surge in post-flood foreclosures. Compounding the issue is the fact that many inland instances of smaller scale flood damage do not reach federal disaster declaration thresholds, leaving their recovery to local grants and loans and greatly extending recovery times, which means higher risks of delinquency and foreclosure. The analysis “uses SFHA designation as a proxy for insurance coverage, assuming full coverage within SFHAs and no coverage outside them.”
According to First Street, these data points have largely flown under the radar, leading to hidden credit losses and possible future foreclosures. For instance, after 2012’s Hurricane Sandy, many banks may have underestimated the subsequent foreclosures by up to 393 cases – a $68 million miscalculation that translates to $34 million in credit losses under a 50% loss-given-default assumption. Reporting and understanding the data can bring the “hidden” losses to light and help avoid huge losses in lender portfolios. First Street states that homeowners have their financial stability eroded by these extreme weather events, accelerating property value decline, and when insurance companies pull back from even stable markets, borrowers lose much of their financial insulation, creating a vicious cycle with many much more susceptible to default. The analysis finds climate risk is now a measurable driver of mortgage and credit exposure.
This comes at a time when Florida is already facing a resurgence in foreclosure activity, according to the latest “First Look” report from Intercontinental Exchange. While much of the country has delinquency rates still below pre-pandemic norms, Florida was an outlier with the most pronounced year-over-year deterioration in mortgage performance. The Sunshine State experienced a 12.3% increase in its non-current loan rate with 1.3% of loans at 90+ days past due.
LMA Newsletter of 6-2-25
