Cotality: Homeowners With Negative Equity Increasing

Cotality's Homeowner Equity Report for Q3 2025 shows U.S. borrower equity fell by $373.8 billion (‑2.1% year‑over‑year) to $17.1 trillion for mortgaged homes — down from a peak near $17.7 trillion in Q2 2024 — while negative equity rose to 2.2% of homeowners (about 1.2 million properties), a 21% YoY increase (+216,000) and a 6.7% rise versus Q2. The firm cites slowing home‑price growth and affordability‑driven over‑leverage among recent and lower‑income buyers (piggyback loans, minimal down payments) as drivers, a shift that increases localized credit and market‑cycle risk for mortgage investors and servicers even though aggregate homeowner equity remains elevated historically.

Analysis

Cotality's Homeowner Equity Report for Q3 2025 shows borrower equity declined by $373.8 billion (−2.1% year‑over‑year) to $17.1 trillion for mortgaged homes, down from a peak near $17.7 trillion in Q2 2024; equity has oscillated between $17.0T and $17.6T since that peak. Negative equity rose to 2.2% of homeowners — about 1.2 million properties — representing a 21% YoY increase (+216,000) and a 6.7% increase versus Q2.

Cotality cites slowing home‑price growth and affordability stresses, particularly over‑leverage from piggyback loans and minimal down payments among recent and lower‑income buyers, as key drivers of the rise in negative equity. The report also links the Q3 deterioration to normal seasonality as the spring buying season faded into a weaker fall market, implying increased sensitivity if price growth remains muted.

While 2.2% remains low historically and most homeowners retain substantial equity, the accelerating count of underwater mortgages is a concentrated credit signal for mortgage investors, servicers and regional lenders with exposure to recent vintages and low‑down‑payment cohorts. This trend is a localized early warning rather than evidence of broad systemic distress, but it warrants closer loan‑level and regional monitoring given the magnitude of the YoY increase.

Key Decisions for Investors

• Reassess exposures to mortgage investors, servicers and non‑agency mortgage holdings with concentration in markets or vintages characterized by recent purchases and low down payments,
• Stress‑test portfolios and MBS positions for scenarios that extend the reported 21% YoY rise in negative equity and slower home‑price growth, and size potential credit loss reserves accordingly,
• Monitor upcoming HER releases, regional home‑price indices and loan‑level metrics (LTV by purchase vintage, prevalence of piggyback loans) as leading indicators and implement targeted hedges or duration reduction if adverse trends continue,
• Prefer counterparties and lenders with stronger capital cushions, diversified servicing revenue and limited exposure to recent low‑down‑payment cohorts when adding or maintaining credit exposure in the housing complex