Climate Risk Is the New Credit Risk

How Climate Risk is Changing Mortgage Lending in Southern California

As wildfires, floods, and other extreme weather events become more common in Southern California, they are reshaping not just the landscape but also the mortgage industry. A new report from First Street Foundation, a leading climate risk modeling firm, reveals a growing trend: mortgage lenders and insurers are beginning to factor climate exposure into lending decisions. This shift means that traditional metrics like credit score and income are no longer the only considerations when evaluating a borrower’s eligibility or a property’s value.

Why Climate Risk Now Matters in Real Estate and Lending

For years, climate-related risks were secondary concerns when buying or refinancing a home. However, today, the financial risks tied to natural disasters—especially in high-risk zones across California—are becoming harder to ignore. From rising insurance premiums to sudden shifts in property values, climate is now a key variable in your home’s financial health.

Key Insights from the First Street Report

If you’re a homeowner or prospective buyer, here’s what you need to know:

• Foreclosure Rates Are Higher in Climate-Risk Zones

Properties located in wildfire-prone or flood-prone areas are seeing increased rates of default and foreclosure. Costly repairs, insurance gaps, and decreased home values after major events contribute to this trend.

• Insurance Premiums Are on the Rise

Homeowners in high-risk areas are facing sharp increases in insurance costs or, worse, losing coverage altogether. This situation can dramatically affect monthly budgets and long-term financial planning.

• Mortgage Terms May Shift Based on Location

Lenders are beginning to adjust borrowing terms based on a home’s exposure to climate risks. This could result in higher interest rates, stricter approval processes, or additional documentation requirements for properties in vulnerable areas.

Understanding Climate Risk in Your Area

What is Climate Risk?

Climate risk refers to the potential financial losses resulting from climate-related events. It encompasses various factors, such as extreme weather patterns, rising sea levels, and natural disasters. For homeowners and buyers, understanding these risks is essential.

Evaluating Your Home’s Climate Risk Profile

Start by assessing your property’s climate risk. Tools like Risk Factor™ or your local hazard mitigation map can help you gain insights into potential hazards. Knowing your risk score can be the foundation of your decision-making process.

What You Can Do to Prepare

The information presented is not meant to alarm you; rather, it is meant to empower. Understanding how climate risk intersects with homeownership allows you to make smarter decisions moving forward. Here are several ways to stay ahead:

• Evaluate your home’s climate risk profile.

Utilize resources such as Risk Factor™ to understand potential climate impacts.

• Talk to your lender or mortgage advisor

Discuss how your location might influence borrowing terms. Stay informed about how climate risk factors into current lending practices.

• Plan for rising insurance costs

Budget conservatively for insurance premiums. Compare providers annually to ensure you are getting the best rates.

• Consider climate-resilient upgrades

If you're remodeling or renovating, invest in features that enhance your property’s resilience, especially if you live in a high-risk zone.

The Future of Mortgage Lending

How Economic Policies are Evolving

Mortgage lenders are reevaluating their risk assessment models in light of climate change. As government policies shift towards more sustainable practices, lenders may increasingly incorporate these factors into their business models. This might include offering incentives for energy-efficient homes or prioritizing loans for properties with climate-resilient features.

Embracing Sustainable Practices

The mortgage industry is beginning to embrace sustainable practices. Homeowners who invest in green technologies, such as solar panels or energy-efficient appliances, may find more favorable lending terms. Adopting such measures not only contributes to environmental sustainability but can also enhance your property’s marketability.

Final Thoughts

Climate risk is becoming a core part of the real estate conversation in Southern California. Whether you’re buying, refinancing, or planning renovations, understanding this shift can help you make more informed—and resilient—financial decisions.

Want to talk through how climate impacts your mortgage options? Our team at Peregrine Financial is here to help. We offer personalized guidance so you can plan with confidence, no matter what the future holds. Don't let the unforeseen stresses of climate risk dictate your financial future. Seek advice, stay informed, and take proactive steps.

For additional resources, consider visiting First Street Foundation for more insights into climate risk and mortgage lending trends.