Underwater And Uninsured: How Climate Risk Is Reshaping The US Mortgage Market

As climate change intensifies, its effects are no longer confined to coastlines or news reports on extreme weather. In the United States, the nation’s $12 trillion mortgage market is starting to feel the pressure. In floodplains, fire zones and hurricane corridors, rising insurance premiums and falling property values are combining to undermine the basic economics of homeownership. For many borrowers, the dream of owning a home is colliding with the new reality of climate-driven financial instability.

This growing dislocation poses a direct challenge to the structure of housing finance. Insurers are pulling out of high-risk regions, homes are losing value, and homeowners are increasingly unable to afford the protection lenders require. The result is a mortgage market facing threats not from interest rates or defaults alone, but from the physical world itself.

Regional Risk Is Becoming Financial Risk

Climate vulnerability is not evenly distributed. Coastal communities in Florida, wildfire-prone towns in California, and low-lying Gulf Coast counties are at the epicenter of the shift. Once prized for their natural beauty or low tax environments, these areas now face growing scrutiny from insurers, lenders, and regulators.

Sea-level rise, more intense hurricanes, and expanding wildfire seasons have made certain ZIP codes synonymous with mounting insurance losses. The First Street Foundation, which tracks climate exposure in the US, estimates that over 39 million properties face increasing flood risk, many of which are underprotected by current insurance policies or inaccurately rated by FEMA’s outdated maps.

Insurance Retreat Leaves Homeowners Exposed

At the center of the housing climate crisis is a rapidly deteriorating insurance market. In California, State Farm and Allstate have ceased issuing new homeowner policies in large parts of the state, citing wildfire risk and rising construction costs. In Florida, more than a dozen insurers have pulled out or collapsed since 2020, unable to keep up with storm-related claims and reinsurance expenses.

Those left behind are turning to last-resort coverage options like Florida’s Citizens Property Insurance or California’s FAIR Plan. These state-backed programs are often more expensive and offer limited coverage. In some cases, homeowners see premiums triple—or lose coverage entirely.

The consequences ripple outward. Without affordable insurance, buyers back out, appraisals fall, and resale activity declines. As insurance costs rise faster than wages or rental yields, many properties become unaffordable to own, regardless of mortgage rates.

Declining Values, Rising Defaults

The breakdown in insurability is eroding housing values in vulnerable areas. In parts of the Florida Panhandle and Central Valley of California, recent home sales have shown measurable price drops for properties in high-risk zones compared to similar homes nearby. According to Redfin data, homes in flood-prone areas sell for around 5% less on average than comparable dry-zone properties, a discount that has widened in recent years.

Falling property values increase the risk of underwater mortgages, where the outstanding loan exceeds the market price of the home. In such cases, homeowners are more likely to walk away—particularly when compounded by insurance shocks or climate-related damage. These defaults not only harm individual credit scores but also undermine the credit quality of mortgage-backed securities in which many pension funds, banks, and insurers invest.

Lenders Are Starting to Adjust

Mortgage lenders, caught between traditional credit models and emerging climate risks, are slowly recalibrating. Some banks have begun tightening lending standards in high-risk areas, requiring additional insurance verification or larger down payments. Others are piloting climate risk models to incorporate projected hazard data into property appraisals and underwriting.

Fannie Mae and Freddie Mac, the two government-sponsored enterprises that underpin much of the US mortgage system, have begun limited trials using flood and wildfire risk scoring to flag potential long-term exposure. However, broader systemic adaptation is slow, and lenders still operate largely within a framework built in a pre-climate-aware era.

There is also concern about hidden risk in existing mortgage portfolios. Millions of 30-year loans were issued on properties now subject to new levels of climate stress. Without consistent data and standardised reporting, it is difficult for investors and regulators to fully assess how much of the housing finance system is exposed.

Systemic Financial Implications

The potential for climate-related defaults to trigger broader financial instability is beginning to attract regulatory attention. A 2023 Federal Reserve report warned that regional climate shocks could lead to localised mortgage stress that spills over into national capital markets. The FDIC and OCC have urged banks to begin mapping physical and transition risks across lending portfolios.

Rating agencies are also evolving their frameworks. Moody’s and S&P Global have issued warnings that MBS backed by properties in high-risk zones could face downgrades if insurers exit en masse or climate events cause sharp valuation losses.

Left unaddressed, these risks could mirror the feedback loop seen in the 2008 financial crisis: falling property prices, rising defaults, investor uncertainty, and liquidity withdrawals from the secondary mortgage market.

Regulatory Gaps and Policy Inertia

Despite rising concern, US housing and insurance policy has yet to fully adapt. FEMA flood maps, which underpin much of the national flood insurance program, are outdated and fail to account for future climate scenarios. There is no national mandate for insurers or real estate agents to disclose climate risks to buyers. Mortgage disclosure forms rarely include hazard exposure summaries.

Calls for reform include mandatory climate risk disclosure in mortgage lending, modernisation of insurance regulation, and the development of a federal backstop for catastrophic coverage. The Biden administration has taken early steps through the Financial Stability Oversight Council, but coordination between HUD, Treasury, FEMA, and state-level actors remains inconsistent.

Conclusion: A New Era of Housing Finance

The financial architecture of American homeownership is built on the premise that a house is a stable store of value and that insurance provides reliable protection. Climate change is dismantling both assumptions. For homeowners in vulnerable regions, the costs of staying insured—or staying at all—are rising faster than wages or asset appreciation.

As these pressures mount, lenders, insurers, and policymakers will need to rethink the fundamentals of housing finance. Climate resilience is no longer an environmental issue. It is a financial one—and the longer institutions wait to adapt, the greater the systemic cost will be.

Author: Brett Hurll