Climate change should be considered a new core aspect of creditworthiness when prospective home buyers apply for a mortgage, a new report suggests. The analysis from the climate risk financial modeling firm First Street is a groundbreaking nationwide look at the ties between the growing risks from extreme weather such as floods and wildfires, and a long-suspected spike in mortgage defaults in hard-hit areas. It finds that lenders and borrowers are exposed to more financial risk than they are aware of because current ways of determining creditworthiness leave out exposure to climate disasters as a factor. If climate risk were to be taken into account by lenders — which the analysis shows may be increasingly necessary as climate change worsens the severity and frequency of certain extreme weather events — then the next time someone goes to get a home loan their credit score could be knocked down (or adjusted upward) due to their climate risk exposure. At the same time, mortgage lenders could become more hesitant to provide policies, or raise the cost of borrowing, in certain risky areas with greater exposure to climate-related hazards. First Street finds weather-driven mortgage foreclosures could cause $1.2 billion in lender losses in today’s climate, with the majority of that happening in just three states: California, Florida and Louisiana. Over the next decade, this could increase to up to $5.4 billion per year by 2035, which would be about 30% of annual lender losses, the report says. “This growing share of foreclosure losses is largely driven by the escalating insurance crisis and the increasing frequency and severity of flooding anticipated in the next decade,” the report states. Helene's effects continue to be seen across the Southeast after the historic storm leveled communities, knocked out power and stranded many in floodwaters.The storm made landfall last week as a monstrous Category 4 hurricane. Its massive wind field was wide enough to stretch from Indianapolis to Washington, DC, and its huge size resulted in higher storm surge and dangerous winds that stretched well inland.The hurricane also unleashed its fury on parts Mexico’s Yucátan Peninsula and Cuba. It is well-known that the cost of home insurance is increasing in many areas due in part to climate change-driven hazards. This is causing insurance policies to become unaffordable for many people, which exposes them to financial risk from a flood, wildfire or hurricane, for example. It is also prompting insurance companies to flee particularly disaster-prone locations, such as Florida and California. In California, State Farm is raising rates by 17% in one year due in large part to wildfire-related losses. “When climate events destabilize local housing markets, it doesn’t just affect those directly hit,” said Jeremy Porter, head of climate implications for First Street and an author of the report. “It ripples through the financial system, driving up mortgage rates, directly impacting individual credit risk, and pricing more people out of homeownership,” Porter said. Relying on a combination of peer reviewed methods and new techniques, Porter looked at the number, amount and pattern of foreclosures following wildfire, extreme wind and flooding events nationally. He found the best predictor of rising foreclosure rates among climate-related factors is flooding, particularly when it occurs outside of FEMA flood zones, where homeowners are far less likely to have flood insurance. The study also linked rapid increases in insurance premiums over time at the ZIP code level to increases in foreclosures in those same ZIP codes, finding that insurance increases are putting many families in a more financially vulnerable position and creating greater risks for lenders. Properties flooded in an extreme weather event face a 57% higher foreclosure rate than nearby, unflooded homes, Porter said. One underlying trend used for the study is the rapid increase in costs of natural disasters in the US, as shown in the National Oceanic and Atmospheric Administration’s billion-dollar weather and climate disaster database. However, the agency recently announced that due to staffing cuts and shifting priorities, it will no longer update this list, forcing groups like First Street to rethink their methodology and rely on other, potentially inferior datasets.
Why climate risk could affect your credit score for buying a home
TruthLens AI Suggested Headline:
"Report Highlights Impact of Climate Risk on Home Buyers' Creditworthiness"
CNN
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TruthLens AI Summary
A recent report by First Street, a climate risk financial modeling firm, highlights the critical need for incorporating climate risk into creditworthiness assessments for prospective home buyers. The analysis reveals a concerning correlation between extreme weather events, such as floods and wildfires, and an increase in mortgage defaults, particularly in areas severely impacted by these disasters. It suggests that lenders and borrowers may be unaware of the heightened financial risks associated with climate change, as traditional creditworthiness evaluations do not account for exposure to climate-related hazards. As the frequency and severity of these extreme weather events escalate, it becomes increasingly necessary for lenders to factor climate risk into their assessments. This shift could result in adjustments to credit scores based on a borrower’s exposure to climate risks, leading to potential increases in borrowing costs or reluctance from lenders to extend loans in high-risk areas. The report estimates that weather-related mortgage foreclosures could lead to $1.2 billion in losses for lenders currently, with projections indicating this figure could rise to $5.4 billion annually by 2035, primarily affecting states like California, Florida, and Louisiana.
The implications of climate change extend beyond immediate financial risks; they also contribute to a broader destabilization of local housing markets. The report underscores the role of escalating insurance costs driven by climate-related hazards, which are making home insurance unaffordable for many. As insurance companies withdraw from high-risk regions, homeowners are left vulnerable to the financial impacts of disasters like floods and hurricanes. Specifically, the study highlights that properties that have experienced flooding during extreme weather events face a 57% higher foreclosure rate than their unflooded counterparts. Furthermore, it links rising insurance premiums at the ZIP code level to increased foreclosure rates in those same areas, indicating that escalating insurance costs are pushing families into precarious financial situations. The analysis relies on advanced methodologies to assess foreclosure trends following climate events, revealing that flooding is the most significant predictor of rising foreclosure rates, especially in regions outside of FEMA flood zones where homeowners often lack flood insurance. However, the National Oceanic and Atmospheric Administration's recent decision to halt updates to its billion-dollar disaster database poses challenges for ongoing research in this area, potentially limiting the accuracy of future assessments.
TruthLens AI Analysis
The article explores the implications of climate change on mortgage lending and credit scores, emphasizing the need for lenders to consider climate risk when assessing creditworthiness. It highlights a report by First Street, a financial modeling firm, which reveals the financial risks posed by extreme weather events like floods and wildfires. This analysis suggests that neglecting climate risk could lead to significant financial losses for lenders and increased challenges for borrowers in high-risk areas.
Impact on Creditworthiness
The report argues for a paradigm shift in how creditworthiness is evaluated. Traditionally, credit scores do not account for the risk of climate-related disasters, potentially leaving both lenders and borrowers vulnerable to unforeseen financial consequences. By incorporating climate risk into credit assessments, lenders may adjust credit scores based on geographical exposure to climate hazards, thereby influencing the ability of potential homeowners to secure loans.
Economic Implications
The forecasted financial losses from weather-driven mortgage foreclosures could reach $1.2 billion today, escalating to $5.4 billion per year by 2035. Such figures indicate a growing concern for lenders in states most affected by extreme weather, including California, Florida, and Louisiana. This trend could lead to rising borrowing costs and greater hesitance from lenders to finance homes in high-risk areas, ultimately affecting the housing market and broader economy.
Public Perception and Awareness
This article aims to inform the public about the interconnectedness of climate change and financial stability. By shedding light on the potential impacts of climate risk on credit scores, it encourages a necessary dialogue about the future of mortgage lending practices. The report serves as a wake-up call for both consumers and financial institutions, highlighting the importance of proactive measures in the face of climate change.
Potential Manipulation and Bias
While the article is grounded in research, it may inadvertently create alarm regarding the future of mortgage lending without fully exploring the potential for adaptive measures. The language used suggests a sense of urgency that could lead to panic among potential homebuyers. It is crucial to consider whether the framing of the information aims to push for immediate changes in policy or lending practices, which could be seen as a form of manipulation.
Trustworthiness and Credibility
The credibility of the article hinges on the reliability of the First Street report it references. If the data and assessments presented are accurate, the article serves as a valuable insight into the emerging issues at the intersection of climate change and finance. However, the article's effectiveness in conveying its message could be improved by offering more comprehensive solutions or responses to these challenges.
In conclusion, the article presents a timely and significant examination of how climate risk is poised to reshape mortgage lending and credit assessments. It successfully raises awareness about the potential consequences of climate change on the housing market, while also warranting scrutiny regarding the urgency and framing of its message.