Underwater Mortgages Creep Up As Boomtown Values Slip

Underwater mortgages are a slow rising tide, particularly in pandemic-era boomtowns.

A small — but growing — number of homeowners are facing a home purchase loan with a higher principal than the market value of the home, the Wall Street Journal reported. Those who purchased their homes after prices rose during the pandemic may be in more trouble.

In April, there were more than 500,000 homeowners with underwater mortgages, according to Intercontinental Exchange. That represented the highest reading for the month since 2020.

Cities that were scorching during the pandemic are feeling the effects as prices come down from peak values. Austin, San Antonio, New Orleans and Cape Coral are among the markets singled out with a concentrated number of underwater mortgages.

Underwater mortgages were notable during the 2008 financial crisis. Homeowners were forced to walk away from their properties and let lenders foreclose on them in large numbers.

That’s not expected to be a rampant problem today, even as mortgage rates remain elevated and home value growth slows and even reverses in certain markets. That’s because lending rules were tightened in the aftermath of that financial crisis, according to Redfin economist Chen Zhao, enabling homeowners to better withstand any temporary financial fluctuations.

Borrowers of low-downpayment loans — including those backed by the Federal Housing Administration and Department of Veterans Affairs — account for 75 percent of underwater mortgages nationwide, according to Intercontinental Exchange’s Andy Walden. That’s because they start with less equity in the home.

Having an underwater mortgage doesn’t necessarily spell imminent trouble for an owner who can keep up on their payments, but it could cause other issues for buyers. For starters, they may not be able to turn around and sell without bringing extra cash to the closing table to cover the difference between the sale price and outstanding loan balance.

Additionally, lenders are often hesitant to refinance mortgages for underwater loans.

— Holden Walter-Warner