“Possibility Of Societal Collapse”

In the spring of 2023, Emily West sat down in her Boston University School of Law classroom for a seminar on climate risk and financial institutions. Her professor, Madison Condon, displayed a slide from a Nature Climate Change paper. It mapped how American properties may be overvalued by as much as $237 billion, because their flood risks weren’t fully counted.

Looking at the map, West was shocked. Her hometown of Asheville, North Carolina, jumped out in red. She’d grown up hearing stories about her relatives surviving a devastating 1916 flood, including a family member who swam through the waters to safety as houses and railroad lines washed away. For her final class paper, titled “If the Good Lord’s Willing and the Creek Don’t Rise,” West decided to explore the community’s development in the one-hundred-year flood plain.

What West found was chilling. The popular tourist destination’s recent growth had vastly increased its vulnerability to flooding, at the same time that a housing shortage drove up prices — to the point that West and many of her friends could no longer afford to live in Asheville. “When you need a place to live, and you want a home, you’re going to take more risks,” she says.

Jesse Gourevitch, the Nature Climate Change paper’s lead author, says that nationally there are now perverse incentives for developing in these kinds of high-risk areas. The problem, he says, is driven by a lack of access to transparent, property-level information. “Those prices could readjust in a sudden and chaotic way that could bring instability to the housing market,” he says. Many places where homes are overvalued and underinsured are also heavily reliant on property taxes — so when a hurricane hits, local and state finances might also be upended.

Asheville had taken steps to improve its resilience to flooding, investing millions in developing the low-lying River Arts District. The effort helped residents qualify for discounts through the federal flood insurance program. But interviewing longtime locals about past disasters, West realized that “when the next one-hundred-year flood came, a lot of these places were going to be wiped away.”

This grim forecast was on West’s mind in September, when Hurricane Helene brought cataclysmic flooding to her hometown. Watching the water rise as she’d predicted was like a Black Mirror episode she couldn’t turn off. For two days, West couldn’t reach her parents. Until their service was restored, she didn’t know if they’d survived.

“It’s so crazy to me that it actually happened,” she says. Helene’s destruction proved even worse than she’d imagined. “So very many people lost their homes and lives in the flood, because they were never given the opportunity or warning to evacuate,” she says.

Less than 1 percent of Asheville’s Buncombe County had flood insurance, which is typically sold separately from homeowners’ policies. Many weren’t considered high risk by the federal flood program, which mortgage lenders use to decide where to require flood coverage. Despite recent efforts to update government flooding maps, many are badly outdated; in recent years, the National Flood Insurance Program has paid out far more in damage claims outside of its designated high-risk zones than in them. As a result, the vast majority of Helene’s potentially $250 billion in damages won’t be covered by insurance.

Financial pressures can trap homeowners in a vicious cycle: “You may be very aware of your exposure to flood risk, you may be struggling to make insurance payments,” says Gourevitch. But in places like North Carolina, having a bad credit score makes premiums more expensive, pushing insurance out of reach. Without insurance, the probability of homeowners defaulting on their mortgage after disasters becomes more likely, says Ishita Sen, an assistant professor of finance at Harvard Business School.

Typically, when a homeowner wants to borrow money to buy a house, they go to a bank. After the bank issues the loan, it sells it to government-sponsored enterprises like Fannie Mae or Freddie Mac, often pooling multiple loans together. These big corporations then package the loans into mortgage-backed securities they sell to investors. In theory, this provides important liquidity for the housing market, freeing up more capital for lenders, and guaranteeing mortgage payments for investors. But for the system to work, the actual houses have to stay dry and standing — which is why mortgages require insurance.

But insurance only provides protection if the company can actually pay its claims. As traditional insurers have raised rates or pulled out of states altogether, newer, lower-quality companies are entering the market. They service some of the riskiest properties but tend to hold less capital, Sen explains, and regulators aren’t keeping close enough track of them.

Fannie and Freddie rely on external rating agencies to assess insurers’ stability. They have different requirements for newer rating agencies, such as Ohio-based Demotech, Inc. Demotech’s rating market has grown rapidly in hurricane-prone areas like Florida, where it now rates 50 percent of the state’s insurance policies. Because Demotech primarily works with small insurers that provide important coverage in disaster-prone regions, government-sponsored entities have agreed to less strict rating requirements. Sen’s research finds these same insurers would not pass muster if subjected to traditional rating agencies’ methods.

As a result, 20 percent of companies Demotech rated in Florida have recently become insolvent. When insurers fail, their financial burden falls onto state guaranty funds or federal programs like disaster relief. The erosion of this system allows lenders writing the riskiest mortgages to pass their liability on to taxpayers. In June, Sen told the Senate Budget Committee this lack of regulation is “a transfer of risks from the state of Florida to the rest of the country.”

The committee’s chairman, Senator Sheldon Whitehouse (D-RI), says the warning signs are flashing red. “We’d be fools not to take heed,” he said in a statement to the Lever, “and set our country on a safe pathway to greater economic stability while there’s still a path to take.”

Government-sponsored enterprises appear to agree that they don’t have a good sense of their liabilities: in 2022, Fannie Mae’s climate risk officer wrote to the Federal Emergency Management Authority (FEMA), saying, “Presently, the market is hampered by the lack of a standard metric or set of metrics to understand the risks associated with natural disasters.”

This vast unpriced risk accumulating in the mortgage market concerns experts like Condon, West’s law school professor.

“You’d think that Fannie Mae and Freddie Mac would have someone checking to see whether their mortgage will be paid, or whether that house will be literally underwater,” Condon says. Shockingly, “they don’t really have that infrastructure right now.” (Both entities declined repeated requests for comment.)

Sen thinks the chance of a 2008-style collapse caused by climate change is “relatively low.” Still, when too many hurricanes happen at the same time, or affect too large a swath of the country, she agrees the “dynamic is going to be very challenging.”

As Milton drew closer to landfall, just how big of a hurricane — or how many hurricanes in a row — it would take to knock the global financial security market to its knees remained an open question.

Even when investments themselves aren’t directly impacted by extreme weather, they may be affected because the insurers holding them are exposed. If insurers face large payouts due to climate events, they may sell their holdings in bulk. This kind of sell-off can disrupt pricing even for safer bonds, as happened during the pandemic.

“We’re really not paying attention to this huge looming physical risk,” Condon says. “That we’re not starting to talk about macroeconomic-scale damage is just silly.”

Picking Climate Winners and Losers

Back in Sarasota, Billy Cox sat on his back porch with a beer, ready “to watch the show.” The clouds scudded in, low and ragged. The wind gathered and the oak trees bent to ruin. The branches hissed as they snapped in the dusk, he says, “almost like they were relishing this moment to get back at mankind.” Pink lightning slashed across the sky.

On satellite radar, a ball of birds and insects fifty-five miles wide formed inside Milton’s eye, unable to fly out of its calm, while meteorologists battled online accusations that the government was controlling the weather. Doomscrolling from England, his daughter Savannah knew that the state was particularly unprepared.

Florida has no income tax, she explains, meaning a significant amount of its tax base comes from property taxes. If those go down, there’s less revenue, which makes it harder to provide services and pay outstanding debts.

“To understand the heart of this really maladaptive cycle, you need to go to Miami,” Savannah says. She spent several years along the region’s turquoise waterways, interviewing residents like Bob Kunst, a seventy-eight-year-old fighting the City of Miami Beach over a project intended to channel stormwater away from his neighborhood. The city claimed its pipes increased the area’s resilience to sea-level rise, though opponents argued they actually harmed the bay’s natural defenses by degrading local ecosystems that would have otherwise absorbed storm surges.

Kunst suspected what he called “worthless” infrastructure was less about controlling storm surges and more about the city’s credit ratings. In fact, in a 2019 letter, the mayor of Miami Beach explicitly said that such projects were why the city had maintained strong credit. To build infrastructure, cities like Miami often ask investors for money, promising to repay them in the form of steady interest payments, often with tax advantages. High credit ratings indicate these loans are lower risk and allow cities to borrow at lower interest rates.

As Savannah dug in, she found that rather than relying on clear, evidence-based measures, both rating agencies and government officials hoping for their favor are currently just guessing about what might actually protect vulnerable residents and local economies.

In 2017, Moody’s Investors Service, which provides credit ratings for governments, announced that it would start considering climate resilience in its analysis. But the firm said it would only consider short-term shocks like flooding and not long-term trends like sea-level rise, whose effects are more difficult to observe on metrics like tax revenue. This approach can provide false confidence, Savannah says, ranking certain hazards like wildfires as more threatening than sea-level rise. Moody’s was not able to respond before publication.

It’s also unclear exactly what types of mitigation projects cities will be rewarded for. As one risk management officer told Savannah, “Rating agencies like Moody’s really hold the key to our futures. . . . The problem is that we really just don’t know how they’re thinking about resilience.”

She found that one thing Moody’s analysts do look at is how cities handled past events, even though storm frequency might radically change in the future. That helps wealthy locations like Miami retain comparatively high ratings despite significant risks, while poor places like New Orleans get downgraded. This practice makes it harder to accurately price climate risk.

City planners trying to buy time for their communities need more than just transparency, Savannah says. “They need a different geology, they need a different, less property-driven economy.”

Even worse, only 7.5 percent of municipal debt is insured, meaning when disaster strikes, cities themselves may default.

After Paradise, California, burned to the ground in 2018, for example, the city struggled to repay its bonds. Paradise received a $219 million settlement from the utility PG&E Corporation after their equipment was found to have started the Camp Fire, but rather than repaying its debts, the city earmarked those funds for reconstruction. In response, rating agencies slashed the city’s ratings into junk territory, increasing their borrowing costs and limiting their potential investors.

Paradise is “now shut out of the bond market,” Savannah says, “unable to access capital markets in the future.” That means the city will likely be forced to rely on federal or state aid for any future recovery efforts.

FEMA won’t be able to respond to every catastrophe indefinitely; the disaster relief program ran out of funds in mid-September, forcing Congress to borrow from the 2025 budget to meet immediate recovery needs. To respond to the back-to-back disasters since, the agency has spent $9 billion, or about half of its total funding for the next year.

These shortfalls will very soon get worse: The Small Business Administration, which provides low-interest loans to disaster survivors, ran out of money for loans to hurricane victims on Tuesday. Ultimately, “the federal government is going to pick climate winners and losers,” Savannah says.

As these budget gaps mount, Condon says the federal government needs to ask larger questions about the recovery process.

“No one wants to talk about managed retreat,” she says. “The thing is if we don’t, we’re going to have unmanaged retreat.” Beyond the hundreds of thousands of homes that Helene destroyed, for example, two major interstate highways between Tennessee and North Carolina will likely be closed for months, while hundreds of electrical substations flooded. The North Carolina–based utility Duke Energy warned that in many places, “we are going to have to completely rebuild” — and the costs of doing so will likely be passed on to consumers through rate increases in the six states they serve.

Without a national climate adaptation plan, there are no federal standards requiring utilities or transportation departments to consider future climate risks as they rebuild. Auditors might flag utilities’ liability for wildfires, warning they might need federal bailouts, as Warren Buffett recently wrote in the Financial Times, but regulatory agencies have not developed clear guidelines on how to incorporate physical risk.

“There’s still no coordinated conversation about where it’s even worth rebuilding, or are we going to run out of money,” Condon says.

Though a Government Accountability Office report recently called for a pilot program on climate migration, it’s not as simple as saying people with risky properties should just move. Savannah only has to look as far as her own family to see that. She has family, friends, and colleagues for whom the stress of responding first to Helene and then to Milton has been overwhelming. “It’s a ticket to an early grave,” she fears.

For the first time, Savannah says some of her family is considering leaving Florida. But as Milton’s winds finally waned and her relatives started to assess the damage, they’re not sure if they can sell or where they could afford to move.

Like many Americans, Savannah says they’re now realizing “the things that we tend to take for granted — our homes, our roads, our cities — can just sort of be taken away.”

When Development Looks Like Retreat

The morning after Milton, Sarasota seemed hollowed and bright. “It was like the first breath of autumn,” Billy Cox says, “like Octobers in Florida used to feel forty years ago. It felt nostalgic.” He wandered out onto the abandoned streets, the unnatural quiet broken by distant generators and the thud and burr of chain saws.

Like the economist who shares its name, Florida’s latest hurricane may unintentionally demonstrate how the limits of the free market end up socializing risks. While his daughter was conducting research, Billy visited her in Miami; driving over the bridge into the city, he was stunned by the oblivious new development, the horizon filled with scaffolding and cranes.

In May, Governor Ron DeSantis passed a law erasing references to climate change from state law. With the limestone beneath the city acting like a sponge, “no amount of sea wall is going to stop anything from flooding there,” Billy scoffs. In spite of all the new construction, he asked his daughter at what point smart money would start to panic and leave the state. “It’s already starting,” she told him.

That was before Milton caused an estimated $50 billion of insured losses.

Even before hurricane season, the state’s housing market seemed to be hitting a tipping point: in August, the number of available houses jumped up 50 percent compared to August 2023. The slowdown has prompted institutional investors to sell, too, as managers look to dump properties that have started to look like liabilities.

Amid this reckoning, accurate data about future perils is becoming increasingly valuable. In 2019, for example, Moody’s purchased Four Twenty Seven, Inc., a climate data and risk analysis firm. Meanwhile, First Street, a leader of the climate modeling industry, announced a partnership with online real estate giant Zillow in September. Previously a nonprofit, First Street raised $46 million in funding this year as it transitioned into a public benefit corporation.

As more governments and ratings agencies realize they need to know what climate might cost them, information about how risk assessments are made is often scarce. “We just don’t really know how scientifically robust a lot of these models are,” Savannah says. Last year, scientific experts told the White House that though these estimates affect the national economy and millions of people, they could be “of questionable quality.”

Nor do these black-box algorithms always agree with each other. This summer, scientists at University of California, Irvine, created their own model of flooding risk from rain and rivers in Los Angeles, and compared it to First Street’s national flood maps. The two came to opposite conclusions about which neighborhoods were at high risk, differences researchers warned could “radically reshape assessment” of where cities prioritize mitigation projects.

Such discrepancies are coming to light just as financial institutions are starting to grasp how specific climate risks could impact their portfolios. First Street, which works with over twenty government agencies, as well as Fannie Mae and Freddie Mac and half of the country’s banks, recently published a report on regional banks’ climate vulnerabilities. The firm found even a small number of risky loans could result in a 280 percent increase in net losses. In the resulting report, Jeremy Porter, First Street’s head of climate implications, explained that while every state saw a billion-dollar disaster in 2021 and 2022, it’s not just headline-making calamities that are increasing but also localized events, like hailstorms or sunny-day flooding.

Because small community banks tend to be geographically concentrated, they’re more likely to have investments that might all be affected by a single hazard. In First Street’s modeling, many small institutions crossed the government’s materiality threshold limit, a complex metric that measures financial stability. In total, the banks at risk hold about 11 percent of all outstanding loans.

Unlike large banks, smaller banks can’t simply pull out of risky markets; their capital is typically invested close to home. Many are also regulated by state banking authorities, not federal ones, meaning individual states will need to take action to apply climate-related regulations.

Even major central banks have overlooked physical risks until recently, says Condon. The Bank of England recently conducted climate-related stress tests, assessing the financial impact of various global warming scenarios. But regulators haven’t come to terms with the idea that some of climate change’s economic and financial impacts are now unavoidable, no matter how fast decarbonization occurs. Nor, Condon says, have they “really thought through some of the major systemic tipping points,” like weather-driven food supply shortages or major ocean current patterns breaking down.

At a certain stage, the exercise of quantifying societal collapse feels beside the point. The scale of these concerns highlight the futility of the idea of “climate havens,” places that might be protected from these global changes. There’s nowhere to run.

It’s not geography that shields people from disaster but resources — the ability to relocate and rebuild. Some of the homes that flooded last month in Asheville, for example, were recently built and purchased by émigrés from Florida after investors had mistakenly identified the area as climate-proof.

For West, the Asheville native, even if she could afford to move to a safer part of town, these trends have changed the town she grew up in. With its recent boom in popularity, Asheville as she remembers it was gone long before Helene washed swathes of it downstream, and so are the assumptions of that safer, cooler world.

West says she struggled with her feelings as she was writing her prescient paper about Asheville’s risks. “I went to law school hoping that it would help me understand more about how the world around me works,” she said. She’d hoped that studying the legal system would help her find answers. “Turns out, it just made me learn so much more about how bad things are — how much work needs to be done.”

For his part, despite his daughter’s concerns, Billy isn’t planning on leaving Sarasota just yet. He hopes his favorite haunts will clean up and come back once again. But he’s not sure how much longer anyone will be willing to keep rebuilding.

“People found paradise here,” he says. “Paradise lost.”