The First Street Foundation’s report, “Climate, the Sixth ‘C’ of Credit,” introduces climate risk as a critical factor in credit assessments, alongside the traditional five Cs: character, capacity, capital, conditions, and collateral. This addition reflects the growing impact of climate-related events on mortgage markets and financial stability.
Key Findings
1. Climate Risk as a Credit Factor
The report emphasizes that climate-related hazards—such as floods, wildfires, and hurricanes—are increasingly influencing mortgage defaults and loan viability. This necessitates the inclusion of climate risk in credit evaluations to accurately assess potential losses.
2. Rising Financial Losses
Projections indicate that climate-driven foreclosures could result in $1.21 billion in bank losses by 2025, escalating to $5.36 billion by 2035 during severe weather years. These figures represent a significant portion of total foreclosure losses, highlighting the financial risks posed by climate change.
3. Insurance Market Strain
The increasing frequency and severity of natural disasters have led to higher insurance premiums and reduced availability of coverage in high-risk areas. This shift places a greater financial burden on homeowners, increasing the likelihood of mortgage defaults.
4. Flooding as a Primary Driver
Flood events, particularly in areas outside FEMA’s Special Flood Hazard Areas (SFHAs), are identified as the leading cause of climate-related foreclosures. Properties in these regions often lack mandatory flood insurance, exacerbating financial vulnerabilities.
5. Historical Precedents
The aftermath of Hurricane Sandy in 2012 serves as a case study, where unaccounted flood risks led to unexpected credit losses of approximately $68 million. This example underscores the need for incorporating climate risk into credit models.
Implications for Stakeholders
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Lenders and Financial Institutions: Integrating climate risk assessments can enhance the accuracy of credit evaluations and mitigate potential losses.
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Homeowners and Buyers: Awareness of climate risks can inform property decisions and preparedness measures.
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Policymakers and Regulators: Developing policies that address climate-related financial risks can strengthen economic resilience.
For a comprehensive understanding, you can access the full report here: Climate, the Sixth “C” of Credit.