Introduction

The report examines how physical climate risks are increasingly affecting mortgage performance and credit losses. It focuses on the interaction between extreme weather events, insurance availability, household financial resilience and property values, arguing that climate risk introduces a location-based dimension of credit risk not captured by traditional borrower metrics.

Growing climate risks and escalating insurance claims

Climate-related disasters have intensified over recent decades, with the annual cost of events such as floods, hurricanes and wildfires rising by around 1,580% over forty years. Weather-related damage now accounts for roughly 90% of homeowners’ insurance claims, and average claim sizes have more than doubled since the early 2000s. Flooding is identified as the most financially burdensome hazard, with even minor inundation causing significant property damage.

Insurers respond by increasing rates or exiting markets

Rapid growth in claims has strained insurers, leading to repeated premium increases and market withdrawals in high-risk areas. Since 2018, insurers have implemented more than twenty consecutive quarters of rate rises. Insurance costs now exceed 10% of monthly mortgage payments in some regions, materially increasing the cost of homeownership and reducing household financial flexibility.

Insurers of last resort lead to increased coverage gaps

Flood insurance coverage remains limited, particularly outside FEMA-designated Special Flood Hazard Areas, where it is not mandatory. Average National Flood Insurance Program claims have increased by more than 220% since 2000, while take-up remains low. These coverage gaps leave many homeowners exposed to uninsured losses, transferring climate-related financial risk from insurers to households and lenders.

Insurance issues and indirect impacts lead to financial instability

Rising insurance premiums, declining property values and broader economic conditions interact to amplify mortgage stress. Higher debt-to-income and loan-to-value ratios are observed in climate-exposed counties, indicating weaker borrower resilience. Insurance cost increases can require substantial income growth to maintain affordability, particularly for low- to moderate-income households, increasing the likelihood of delinquency and default.

Climate risk is a threat to residential real estate market stability

Climate risk affects housing markets through reduced affordability and declining location desirability. Property values in high-risk areas are projected to fall by an average of over 6% in regions facing population decline. Even in otherwise strong markets, rising insurance costs can erode prices, increasing negative equity and weakening collateral values for lenders.

Methodology

The analysis combines property-level climate hazard modelling with transaction, foreclosure and loan data. Fifty-five disaster events across floods, wildfires and hurricane winds were examined using matched pre- and post-event windows of up to six years. Properties were categorised by exposure and damage severity to isolate direct and indirect effects on foreclosure outcomes.

Direct impacts: Event-based foreclosures

Around half of analysed disaster events were followed by increased foreclosure rates among physically impacted properties. Flood events produced the strongest and most consistent effects. Damaged properties outside Special Flood Hazard Areas experienced foreclosure increases averaging nearly 52 percentage points more than comparable properties within insured zones.

Loan performance and probability of foreclosure

Changes in loan-to-value ratios and home price trends are closely linked to foreclosure risk. A 10 percentage point increase in loan-to-value following a disaster raised foreclosure probability by roughly 30% relative to baseline levels. Low-income households were disproportionately affected due to thinner equity buffers and limited access to credit.

Indirect impacts

Historical case studies, including Hurricane Sandy, show how pre-event house price declines and weak economic conditions amplify disaster impacts. Sandy generated an estimated US$68 million in unanticipated unpaid principal and interest, exposing “hidden” credit losses not captured by standard models.

Results

Flooding emerges as the primary driver of post-disaster foreclosures, while wildfire and wind impacts are generally more localised. Rising insurance costs, falling equity and economic contractions significantly magnify losses when combined with physical damage.

Forecasting credit risk over the next decade

Projected climate-driven mortgage losses are estimated at approximately US$1.2 billion in 2025, rising to over US$5.3 billion by 2035 under severe weather scenarios. Losses are concentrated in flood-prone, underinsured, high-value regions.

Climate: The 6th “C” of credit

The report concludes that climate risk should be integrated as a sixth core credit factor alongside character, capacity, capital, collateral and conditions. Incorporating high-resolution climate risk data into underwriting, stress testing and portfolio management can improve risk pricing, reduce hidden losses and support financial system resilience.