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Where the stress is building — and why it matters
A tightening patchwork of mortgage pain is emerging across the U.S. Recent industry research shows a growing share of loans sitting well above current home values, and a measurable uptick in foreclosure-related activity that’s feeding a pipeline of potential listings. These pressures aren’t nationwide; they’re concentrated in specific states and metropolitan areas where local market dynamics, historical lending patterns and shifting regulations have combined to push more borrowers into negative equity.
The numbers that anchor this story are striking. ATTOM’s fourth-quarter 2026 analysis found roughly 3% of mortgages were at least 25% underwater, up from 2.5% a year earlier. That rise isn’t evenly spread — a small handful of states bears the brunt, which makes localized market behavior all the more important to watch.
Where negative equity is most acute
The deepest pockets of negative equity cluster in Louisiana, Mississippi, Kentucky, Iowa and Arkansas. In those states, between about 5% and 11% of mortgaged homes meet the 25% underwater threshold. When homeowners must sell while owing more than a home is worth, lenders commonly seize properties and convert them into real estate owned (REO) — assets that attract investors buying distressed portfolios or negotiating directly with banks.
Several forces create these concentrations:
- – Local price declines. Sustained drops in house prices push loan-to-value ratios past dangerous thresholds. – High purchase-era balances. Markets that appreciated quickly have many loans originated at peak valuations. – Economic headwinds. Weak job markets and slow wage growth prolong price recovery and raise default risk. – Low mobility. Homeowners tied to weak local economies can’t relocate, locking in losses.
Because these factors often overlap in certain metros, foreclosure volumes and REO flows can rise quickly within a region even while national averages look benign.
Who’s at risk and what comes next
Households with little or no equity become vulnerable when income or employment falters. Loan structures that delay principal paydown exacerbate the problem: a seemingly manageable mortgage can drift underwater fast when prices slide. The immediate consequence is a shorter path from missed payments to delinquency and, ultimately, foreclosure for the most fragile borrowers.
Recent ATTOM metrics show meaningful increases in foreclosure-related events — default notices, scheduled auctions and bank repossessions — with some measures up around 32% year over year in affected states. That trend points to a growing pool of motivated sellers and lender-held properties. Meanwhile, rising delinquencies among lower-income borrowers and in areas with soft labor markets make further distressed supply more likely.
Landlord behavior, renters’ strain and regulatory friction
Investor appetite is shifting. GigHz’s Landlord Exodus & Housing Stress Index highlights reduced investor exposure in parts of Florida and Texas, where rising operating costs, tenant affordability pressures and tighter local rules have eroded expected returns. In regulated markets, lower-income tenants may spend a larger share of income on housing, increasing turnover and management burdens for owners. Higher maintenance and insurance costs only add to the strain.
By contrast, many Midwestern metros look steadier. Lower operating costs, fewer landlord restrictions and more stable rental demand help preserve margins for smaller landlords and reduce turnover. Cities often cited as relatively favorable for first-time buyers and landlords include Rockford (IL), Erie (PA), Syracuse (NY) and Cleveland (OH) — places that avoided speculative price booms and therefore show less underwater risk.
How investors are repositioning
Investors mindful of volatility are re-directing capital toward markets with dependable rent fundamentals and affordable entry prices. The playbook now favors conservative underwriting and operational readiness: expect longer holding periods, phased capital deployment and more intensive due diligence.
Opportunities remain in REO and discounted portfolios, but they require patience and capacity for rehab and tenancy management. Creative deal structures — seller-financed notes, rent-to-own arrangements, loan assumptions or staged closings — can bridge valuation gaps, but each comes with legal and lien complexities that demand careful vetting. Successful buyers stress-test scenarios for vacancy spikes, slower rent recovery and higher repair costs before committing.
Regulatory and policy context
The numbers that anchor this story are striking. ATTOM’s fourth-quarter 2026 analysis found roughly 3% of mortgages were at least 25% underwater, up from 2.5% a year earlier. That rise isn’t evenly spread — a small handful of states bears the brunt, which makes localized market behavior all the more important to watch.0
The numbers that anchor this story are striking. ATTOM’s fourth-quarter 2026 analysis found roughly 3% of mortgages were at least 25% underwater, up from 2.5% a year earlier. That rise isn’t evenly spread — a small handful of states bears the brunt, which makes localized market behavior all the more important to watch.1
Practical advice for investors and buyers
- – Combine hard data with local intelligence. Loan-level maps, title searches and vacancy metrics are necessary but not sufficient — on-the-ground knowledge of landlord networks, code enforcement and tenant dynamics is a competitive edge. – Underwrite conservatively. Stress-test cash flows for longer holds, higher carrying costs and tougher resale conditions. – Structure deals to align incentives. Shared-equity clauses, staged closings and vendor financing can help, but confirm legal enforceability first. – Prioritize exit clarity. Localized opportunities are likely; broad, simultaneous market dislocations are less probable. Clear, realistic exit plans separate sound investments from traps.
What to watch next
The numbers that anchor this story are striking. ATTOM’s fourth-quarter 2026 analysis found roughly 3% of mortgages were at least 25% underwater, up from 2.5% a year earlier. That rise isn’t evenly spread — a small handful of states bears the brunt, which makes localized market behavior all the more important to watch.2
