The growing impact of severe weather events is expected to drive an increase in home foreclosures and cost mortgage lenders billions—a trend that could drive mortgage rates higher, according to a new report.
While the impact of more frequent and costly weather disasters on the insurance industry is well known, the new report from climate risk analytics firm First Street highlights the growing risk to mortgage lenders.
The study shows that mortgage defaults and foreclosures surge after natural disasters, especially flooding, and estimates that mortgage lenders could face up to $1.2 billion in credit losses from severe weather events in 2025, rising sharply to $5.4 billion by 2035.
Florida, Louisiana, and California are together projected to account for 53% of all climate-related mortgage losses this year, according to First Street.
“Mortgage markets are now on the front lines of climate risk,” says Jeremy Porter, head of climate
implications at First Street. “Our modeling demonstrates that physical hazards are already eroding
foundational assumptions of loan underwriting, property valuation, and credit servicing—introducing
systemic financial risk.”
(First Street)
Although insurance companies are typically the first line of defense for covering the cost of natural disasters, First Street warns that the protective layer provided by insurance is starting to fray.
Rising insurance costs, reduction or cancellation of coverage, and persistent gaps in flood insurance coverage have shifted more of the burden for weather disasters onto homeowners, increasing the risk of mortgage defaults, the report says.
First Street found that floods are the leading cause of disaster-related foreclosures, with foreclosures surging 40% among damaged homes following flood events.
That’s likely because many homes do not carry flood insurance, and traditional homeowners insurance does not cover the cost of flood damage.
In contrast, the report says that properties with wildfire or hurricane wind damage are actually less likely to foreclose relative to undamaged properties following an extreme weather event, because insurance payouts—often sent directly to lenders—cover repairs or outstanding payment balances.
However, as insurance premiums rise to offset increased payouts, the financial strain on homeowners often leads to more defaults overall.
First Street says that for every 1 percentage-point increase in annual homeowners insurance premiums, foreclosure rates rise by 1.05 percentage points nationwide.
The finding comes amid an increase in the frequency and cost of natural disasters. In 2024, there were 27 individual weather and climate disasters with at least $1 billion in damages, second only to the 28 recorded in 2023, according to the National Oceanic and Atmospheric Administration.
First Street estimates that the annual costs from climate-related events have surged 1,580% over the past four decades.
“This surge is fundamentally altering risk assessment for households, financial institutions, and investment portfolios by eroding income and driving losses,” the report warns.
Because lenders respond to higher risk by demanding bigger interest payments, the report suggests that climate risks could begin driving mortgage rates higher, particularly in areas most prone to disaster.
“It’s no longer sufficient to evaluate a borrower’s credit score alone,” says Matthew Eby, founder and
CEO of First Street. “Climate risk associated with the property itself has become a core determinant of creditworthiness. This marks a structural shift in financial risk assessment with major consequences for lenders, investors, and homeowners alike.”
