How Climate Change Could Cause Foreclosure Rate To Spike Nearly 400%
Climate change could be responsible for a 380% increase in foreclosures by 2035, according to research firm First Street's most recent National Risk Assessment.
The assessment also predicts the economic impact of these foreclosures on lenders, and the potential losses could be staggering. First Street's analysis expects mortgage lenders to lose $1.2 billion in natural disaster-related foreclosures in 2025. That figure is expected to go as high as $5.4 billion by 2035. Losses that big could change how mortgage lenders calculate risk.
Currently, most mortgage lenders consider the borrower's income, credit history, and debt load as the biggest potential risks in processing loan applications. First Street believes lenders may be forced to consider how extreme weather events could elevate their risk level when making underwriting decisions. Most banks don't consider the possibility of climate-change-driven foreclosure risk in making loan decisions. First Street assessment suggests they should.
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The potential for billions of dollars in losses is among the many "hidden risks of climate change," Jeremy Porter, head of climate implications for First Street, told CBS MoneyWatch. However, lending isn't the only sector where the possibility of major losses exists. The numerous kick-on effects of climate change are already impacting the insurance industry, which is a critical piece of the home ownership and financing equation.
Insurers nationwide are already raising premiums to account for the increased risks that come with climate change. Those premium increases are already eating into buyers' purchasing power and monthly budgets. First Street estimates that the nationwide foreclosure rate increases by 1% for every 1% increase in insurance premiums. That's assuming borrowers can even get insurance at all.
Many states are already reeling from a one-two punch insurance crisis. Major insurers are exiting California and Florida, while the remaining insurers are raising premiums to astronomical levels. It's only a matter of time before that trend begins spreading to other states at elevated risk of climate-related disasters. The Gulf Coast and many Sunbelt states are all facing a massive uptick in extreme weather events whose effects are exacerbated by climate change.
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First Street believes this combination of all these factors could make climate-change-related foreclosures a national crisis. Buyers are already stretched to their limit in terms of home prices. Consequently, they avoid markets with high property values and/or elevated insurance premiums. That, combined with the risk of natural disaster, drives down property values in the affected markets. This eats into a homeowner's equity.
At the same time, homeowners in those markets are paying insurance premiums based on the original elevated property values. First Street's assessment used Hurricane Sandy as an example. It noted that property values had dropped by 14% in the five years before the storm. Declining property values, reduced equity, and damage from flooding caused foreclosures in the affected areas to spike, leaving lenders with a $68 million loss.
Homeowners often find themselves stuck between a rock and a hard place after natural disasters. Imagine yourself buying a $450,000 home in Florida with bank financing. The mortgage lender requires you to carry a policy covering the house, and a natural disaster hits. You file a claim, and the insurer declares your home a total loss.
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If you still owe money on the mortgage and the claims payout doesn't satisfy the debt, you're stuck, and so is your mortgage lender. You're not going to continue paying a mortgage on a house you can't live in after it's been destroyed by a natural disaster. At that point, your best option may be to walk away from the house. Now, imagine being a regional bank carrying thousands of mortgages in the same area.
If a large percentage of those homeowners walk away from the house, lenders get left with a foreclosure spike. All it takes is one natural disaster to start this cycle. Unfortunately for lenders and borrowers alike, climate change is increasing the frequency of natural disasters. Those disasters are becoming increasingly powerful. It all adds up to an elevated risk level that lenders will have to account for going forward.
All of this is more bad news for prospective homebuyers. If foreclosures spike and the risk of lending increases, banks will respond the only way they know how: by making it more expensive to borrow money. It's another canary in the coal mine or the U.S. real estate industry.
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This article How Climate Change Could Cause Foreclosure Rate To Spike Nearly 400% originally appeared on Benzinga.com
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