Report: When a neighborhood floods, foreclosures often follow

By Leslie Kaufman, Bloomberg

As climate change worsens extreme weather around the US, floods are increasing the risk of home foreclosure, according to a new report by First Street Technology Inc., a climate-data company.

A big part of the reason why is that unlike damage from hurricane winds and wildfires, flood damage isn’t covered by standard home insurance. Only a small percentage of Americans hold separate flood insurance.

First Street analyzed 55 wind, wildfire and flood events that took place in the US between 2000 and 2020. It then compared the foreclosure rates in affected areas to those in unaffected areas nearby for three years before and after the event. Foreclosure data was collected from county assessor offices.

The analysis found that of 16 wind events, six were followed by a rash of foreclosures. Of 10 wildfires, only one preceded a foreclosure wave. But out of 29 floods, 20 were followed by an unusually high number of foreclosures.

The wind foreclosures stemmed from delayed insurance payouts or disputes with insurers, according to First Street, whereas the flood foreclosures were largely due to lack of insurance. The nine floods not associated with more foreclosures were in affluent neighborhoods where home values were rising.

“Mounting flood risk coupled with gaps in flood-insurance coverage and low policy take-up are amplifying losses and triggering foreclosure,” the report states.

The widespread lack of flood insurance could adversely impact credit markets in the form of higher-than-anticipated loan failures.

Using 2012’s Hurricane Sandy as a case study, the analysts found that damaged homes were more likely to be foreclosed on. Hundreds more defaults than expected meant $68 million in unanticipated loan write-offs.

The research highlights the need for financial institutions and regulators to adopt climate-adjusted credit models, Matthew Eby, founder and CEO of First Street, said in a statement. “It’s no longer sufficient to evaluate a borrower’s credit score alone. Climate risk associated with the property itself has become a core determinant of creditworthiness.”

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