The Equity Trap: Millions of Homeowners Now Have Even Less Equity Than They Think!

The Number of Potential Short Sales Has Become Much Larger

We’ve been talking about increasing mortgage delinquencies for several months, but there’s another number I want everyone to pay very close attention to.

Homeowner equity.

And more importantly, how much equity a homeowner actually has when it comes time to sell their property.

Because there’s a tremendous difference between what a property is worth, what public records suggest the homeowner owes, and how much money that homeowner would actually walk away with at closing.

That difference is going to create a lot more short-sale opportunities over the next several years.

Let’s Start with the Latest Numbers

According to ATTOM’s second-quarter 2026 Home Equity and Underwater Report, released August 20, the percentage of seriously underwater homeowners has increased significantly over the past year.

Here’s what the latest numbers tell us:

• 2% of mortgaged residential properties are now seriously underwater, compared with 2.7% one year earlier.
• That’s an increase of approximately 5% in the seriously underwater rate in just 12 months.
• Applying that 3.2% rate to approximately 51.7 million mortgaged homes gives us an estimated 65 million seriously underwater properties.
• The percentage of equity-rich homes has fallen from 47.4% a year ago to 41.1%, the lowest level in nearly five years.
• Seriously underwater rates have worsened in 33 states and the District of Columbia over the past year.

These are significant changes!

And remember, ATTOM considers a property seriously underwater when the combined estimated mortgage debt is at least 25% greater than the property’s estimated market value.

That means a home worth $300,000 could have $375,000 or more in mortgage debt.

But here’s where things get even more interesting.

Those 1.65 million seriously underwater properties are only part of the story!

They don’t include homeowners who are underwater by 5%, 10% or 20%.

And they certainly don’t include homeowners who technically have positive equity but cannot afford to sell their homes after paying commissions, closing costs, concessions and other expenses.

That’s where the real opportunity becomes much larger.

The Equity You See Isn’t Always the Equity That’s There!

Let me give you a simple example.

Suppose you’re researching a homeowner in your market.

You pull up the property records, check the estimated value and review the mortgage history.

Here’s what you find: At first glance, that homeowner has $15,000 in equity.

Perceived Equity

Property information	Amount
Current estimated market value	$300,000
Estimated mortgage balance	$285,000
Apparent homeowner equity	$15,000

Not a lot, but they’re not underwater.

Or are they?

Let’s assume the total costs associated with selling the property are 9%. That could include brokerage compensation, title expenses, concessions, transfer taxes and other closing costs, depending on the transaction and local market.

Nine percent of $300,000 is $27,000.

Actual Equity

Sale calculation	Amount
Sales price	$300,000
Selling expenses (9%)	-$27,000
Net proceeds before mortgage payoff	$273,000
Mortgage payoff	-$285,000
Shortfall at closing	-$12,000

Now let’s look at the transaction again. That homeowner has $15,000 in equity on paper but would need approximately $12,000 to close the sale!

And we haven’t even accounted for overdue HOA dues, property taxes, judgments, deferred mortgage balances or other liens.

What if that homeowner also has a $15,000 FHA partial claim?

Now the shortfall could be $27,000.

Add a $5,000 HOA payoff and suddenly the homeowner may need $32,000 to sell a property that public records suggest has positive equity.

That’s a very different situation!

Of course, these are illustrative numbers. The actual payoff, selling expenses and any subordinate obligations must be verified, and not every homeowner facing a shortfall will qualify for a short sale.

But the point remains.

A homeowner doesn’t have to be underwater based on market value reports to need a short sale.

They only have to owe more than the net proceeds available from the sale and be unable or unwilling to cover that difference, subject to investor approval.

What About All Those Partial Claims and Deferred Balances?

Here’s another issue we’ve been talking about in our training.

Many homeowners have additional mortgage-related obligations that aren’t obvious when you’re looking at the original recorded mortgage.

During the pandemic and the years that followed, millions of borrowers received various forms of mortgage assistance.

Depending on the loan program and the type of assistance, some homeowners ended up with deferred balances, partial claims or subordinate liens.

Those obligations may not require monthly payments today.

But that doesn’t mean the money has been forgiven!

In many cases, those balances become due when the homeowner sells, refinances or pays off the original mortgage.

An agent who looks only at the first mortgage balance could completely misunderstand the homeowner’s financial position.

That’s why we’ve repeatedly emphasized the importance of obtaining accurate payoff statements, reviewing title and identifying every obligation that could affect the sale.

Don’t assume the mortgage balance you see in your property-data system tells the whole story.

It may not even come close!

Now Add Declining Home Prices!

Here’s where the situation becomes even more concerning.

In many markets, properties are taking longer to sell, sellers are making more concessions, and buyers have become much more selective.

Homes that need repairs or updating can be especially difficult to sell without substantial price reductions.

What happens to our example if that $300,000 property declines another 5%?

The value drops to $285,000.

Assuming the same 9% selling costs, the homeowner would net only $259,350 before paying off the mortgage.

Against the original $285,000 mortgage balance, that creates a shortfall of $25,650.

And that is before any additional liens or deferred balances.

That’s how quickly a homeowner with what appears to be positive equity can find themselves unable to sell.

This is especially important for homeowners who purchased with small down payments during 2022, 2023 and 2024.

Many had limited equity cushions from the beginning.

A relatively modest decline in value, combined with selling expenses and other obligations, can eliminate their ability to sell conventionally.

Don’t Forget the Mortgage Delinquency Numbers

Now let’s connect homeowner equity to the mortgage-performance figures.

According to ICE Property Data (ICE), August 2026 First Look report, released September 28:

• Approximately 1,956,000 mortgages were at least 30 days delinquent but not in foreclosure.
• 574,000 borrowers were 90 or more days delinquent but not yet in foreclosure.
• That serious-delinquency figure increased by 11,000 from July.
• Serious delinquencies were approximately 19% higher than one year earlier.
• Active foreclosure inventory was up approximately 41% year over year.

There is some important perspective here. Overall mortgage delinquency remains relatively low compared with historical levels, and ICE reported that much of August’s increase in the total delinquency rate reflected calendar effects.

But the number of seriously delinquent borrowers and the growth in foreclosure inventory deserve our attention.

Now consider how these two trends can overlap.

A homeowner who is financially struggling but has substantial equity may be able to sell conventionally.

They can pay off the mortgage, cover their selling expenses and move on.

But what happens when that same homeowner has little or no usable equity?

They may not be able to sell without negotiating with their lender.

And if they’re already several months behind on their mortgage, the problem becomes even more complicated.

That’s exactly where short sales and other loss-mitigation alternatives become so important.

The Real Opportunity Is Larger Than the Seriously Underwater Number

We’ve discussed approximately 1.65 million seriously underwater properties.

But how many additional homeowners have insufficient equity to cover their selling expenses?

How many have deferred balances that aren’t reflected in a simple mortgage-balance estimate?

How many have accumulated HOA liens, unpaid taxes or other obligations?

We don’t yet have a reliable national count that captures all of those factors together.

But when you consider the number of mortgaged properties, it doesn’t take an enormous percentage to create millions of potentially equity-constrained homeowners.

For illustration, if just 8% of approximately 51.7 million mortgaged properties lacked sufficient usable equity after selling expenses, that would represent more than 4.1 million homes.

That’s a scenario, not a verified count of short-sale candidates. Many such homeowners are current on their loans, have other financial resources or have no intention of selling.

Nevertheless, it illustrates why focusing exclusively on properties officially classified as seriously underwater misses an important part of the market.

The short-sale opportunity isn’t limited to people who owe more than their homes are worth. It’s also about homeowners who owe more than their homes can NET at closing.

That’s a distinction every Certified Short Sale Expert needs to understand.

What Should You Be Doing With This Information?

First, stop limiting your marketing research to foreclosure notices and properties classified as underwater.

Begin looking at the homeowners who may have very little usable equity.

Pay particular attention to recent low-down-payment purchases, neighborhoods experiencing price declines, properties with HOA liens and owners facing other financial pressures.

Second, make sure you understand how to calculate a realistic seller net sheet.

Not just a simple estimated value minus mortgage balance.

You need to consider the probable selling price, transaction expenses, outstanding liens, mortgage arrearages, deferred obligations and actual payoff amounts.

Third, use this information in your marketing.

Educate homeowners about the difference between market value and net equity.

Explain why someone may have difficulty selling even when public records suggest they have equity.

And explain that foreclosure isn’t necessarily the only alternative when a homeowner can no longer afford to keep the property.

Fourth, build relationships with other real estate professionals.

Many agents don’t recognize these situations until they take a listing and discover the seller cannot deliver clear title because the available proceeds aren’t enough to satisfy the obligations.

That’s an excellent opportunity for a properly trained short-sale specialist to help.

Here’s the Bottom Line

The published underwater mortgage numbers are concerning, and the trend over the past year has been moving in the wrong direction.

But they’re not the whole story.

As home values soften in certain markets and selling expenses consume more of the remaining equity, additional homeowners may find themselves unable to sell through a conventional transaction.

Combine that with growing serious mortgage delinquencies, deferred mortgage balances and increasingly aggressive HOA collections, and you begin to understand why we’ve been emphasizing short-sale training and preparation.

Not every one of these homeowners will need a short sale.

But many who do will need professional assistance from someone who knows how to evaluate the property, understand the obligations, negotiate with creditors and get the transaction closed.

That’s the business we’re preparing you for!

The agents who understand the difference between apparent equity and actual net equity are going to be in a much better position to identify these opportunities.

Don’t just look for underwater homes.

Look for homeowners who cannot afford to sell.

That’s where a substantial part of tomorrow’s short-sale business may be found.