MW The surprising factor that's driving up home-foreclosure rates

By Aarthi Swaminathan

An increase in homeowners-insurance premiums is associated with a higher risk of foreclosure, group says

When Colin Lamprey's Idaho Falls, Idaho, home flooded two years ago, his first instinct was to fix it.

He had bought the home during the depths of the pandemic in the summer of 2020 for $209,000 with a $7,000 down payment. In May 2023, a flash flood hit his neighborhood and wiped out the house, undoing its entire foundation and filling the basement with seven feet of water at one point.

Lamprey was told that the repairs could end up costing as much as the house itself. Because the foundation was heavily damaged, he would potentially have to lift the house and replace everything underneath. "I wanted to save the house. ... If I had sold it right before the flood, I would have made $100,000 on it," Lamprey, who works in the food industry, told MarketWatch.

To add salt to the wound, his homeowners-insurance policy lacked flood coverage and was not going to reimburse him. He didn't have separate flood insurance since his home wasn't in a designated flood zone.

His mother, who had flown out to Idaho to help, told him not to spend another dime on the house since he was likely to lose it due to the high cost of repairs. A lawyer he hired recommended he file for bankruptcy, telling him, "You don't want your whole life ruined by it." Lamprey soon declared chapter 7 bankruptcy, seeing it as his only way out.

Lamprey's experience illustrates a growing risk many American homeowners face as climate change increases the frequency of natural disasters.

Foreclosure risk is rising due to the direct and indirect impacts of flooding, according to a new report from the climate-risk research group First Street, posing a threat to the stability of the U.S. housing market. Lenders face the possibility of losing billions of dollars due to weather-related mortgage foreclosures, the company said.

"We found that climate risk has an independent impact on foreclosure rates," Jeremy Porter, head of climate implications at First Street, told MarketWatch.

Traditional metrics that lenders use, such as a borrower's credit history, their ability to repay the loan and their net worth, help them evaluate a borrower's creditworthiness. But climate is becoming an increasingly important risk for lenders to consider, Porter said, given its impact on delinquencies and foreclosures.

From floods to wildfires, more homeowners are dealing with costly damage to their properties from natural disasters. One in seven homes in the U.S. are uninsured, according to an analysis by LendingTree, translating to about 11.3 million homes occupied by homeowners.

Lack of flood coverage in particular is due in part to federal-government maps not accurately reflecting flood risk. The government's maps of flood zones are also considered by some experts to be outdated. Homeowners with a mortgage in flood zones are generally required to get flood insurance.

"We don't map flood risk very well, [and] because we don't map flood risk very well, people are uninsured for it," Porter said. "And our models clearly show where there are significant floods, foreclosures follow."

Floods are increasing the risk of foreclosure

The First Street report, which factored climate risk into credit-risk modeling, had two major findings.

First, the researchers found that properties that were flooded in an extreme-weather event faced a higher foreclosure rate than unflooded homes nearby. In other words, foreclosure risk rises when a homeowner experiences flooding damage to their property.

Second, rising homeowners-insurance premiums also contributed to foreclosure risk.

Even homeowners who have not experienced natural disasters firsthand are affected by them. As insurers raise homeowners-insurance premiums to account for climate-related risk, home-insurance costs are rising across the country. The average annual property-insurance premium paid by homeowners with a mortgage rose 61% over the past five years to $2,290 in 2024, according to a March report by Intercontinental Exchange $(ICE)$.

An increase in annual insurance premiums of $1,500 to $1,600 - a 6.6% increase - would drive up the foreclosure rate of an area by 6.9%, according to the First Street report. That means homeowners in some parts of the country who are unable to afford sharp increases in insurance premiums are driven to miss payments and subsequently lose their home in a foreclosure.

"As insurance increases happen in the community, you put stress on people's household budgets and household finances," Porter said. "We know that makes them more susceptible to delinquencies, to defaults, ultimately to foreclosures. [But] the fact that we're already seeing that in the data was a surprise."

First Street has previously worked with real-estate companies like Redfin $(RDFN)$ and Zillow (Z) to highlight climate risk alongside other factors people take into account while searching for homes, such as the quality of schools and walkability.

'It could've been worse'

Back in Idaho Falls, Lamprey sold his home earlier this year.

He had been getting calls over the past year from people who wanted to buy the house, which was going up for auction in a foreclosure proceeding. After a chapter 7 bankruptcy is completed, the lender can sell the home in a foreclosure, according to Nolo, a legal-information website.

His lawyer suggested he sell it before it went into foreclosure to avoid negatively impacting his credit score. He eventually did just that, selling his home for under $200,000.

"It was a lot of work to get everything to that point, but at least I don't have the foreclosure," Lamprey said. "Not a fun situation, but it could've been worse." He has since moved to Wisconsin, where he rents a property with his fiance.

He has also learned a valuable lesson. "I'll probably be getting flood insurance on every house I get from now on," he said.

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 21, 2025 15:34 ET (19:34 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.