More than 10% of recent homebuyer loans are slipping underwater

The share of recent homebuyers with negative equity has moved into the double digits, two recent reports show.

More than 11% of borrowers who took out loans to buy houses last year had properties worth less than the debt on them in February. A little over 8% of purchase loans from 2022 had negative equity when Black Knight analyzed this group of consumers late last year.

The jump in negative equity rates erodes a key financial buffer against loan performance issues for this group of borrowers, but so far the degree to which loans are underwater is marginal.

Negative equity in the mortgage market as a whole — including all vintages and types of loans — was still low at just 1.42% of all loans in February. With refinances included, the underwater rate for the 2022 originations was lower than for purchases alone at 7.5%.

Purchase mortgages from last year are more likely to be upside down because home prices, while softening, remain high enough that a lot of borrowers continue to have trouble putting much money down at closing.

"Many recent originations that are currently underwater are FHA/VA loans that – requiring much lower down payments than conventional loans – typically rely on principal paydowns and price growth over time to improve their equity positions," Andy Walden, vice president of enterprise research at Black Knight, said in an email. (FHA/VA loans are mortgages that the Federal Housing Administration or Department of Veterans Affairs back.)

Those two agencies guaranteed or insured nearly three-quarters of upside-down mortgages from 2022.

The share of more recent borrowers underwater on their purchase mortgages may have gotten even higher in the past month, according to March numbers from a small survey group limited to people in certain cities. 

More than one out of every four or 27% of survey respondents who purchased residences in the last 11 months or so have homes worth less than the loans on them, Insurify found in a report it issued this week. 

The comparison shopping site for insurance surveyed 700 respondents in eight cities, including Denver, Houston, Los Angeles, New York, and Phoenix. Homeowners in Boise, Idaho; Columbus, Ohio; and Tampa, Florida also participated in the study.

California and New York are particularly vulnerable to home price declines, real-estate data provider Attom found in a recent report.