A favorite tool of big homebuilders — buying down homebuyers’ mortgage rates — is inflating home values and leaving borrowers making small down payments at a higher risk of ending up underwater on their loans, The Wall Street Journal reports.
More than one in four FHA mortgages originated by Lennar Mortgage between 2022 and 2024 (27 percent) are underwater, meaning borrowers own more than their home is worth, according to an analysis by John Comiskey, the founder of Reverse Engineering Finance.
Similarly, 18 percent of FHA loans originated by DHI Mortgage — homebuilder D.R. Horton’s lending arm — during the same period are underwater, Comiskey’s analysis for the Journal found.
Lennar and D.R. Horton did not respond to Inman’s requests for comment. D.R. Horton and DHI Mortgage were sued last month by a group of borrowers who claim their monthly payments increased after their loans closed because their property taxes hadn’t been included.
Homeowners who are underwater are more likely to end up in foreclosure if they have trouble making their mortgage payments because they can’t pay off their loan by selling their home unless their lender agrees to a short sale.
But the problem is not unique to recent buyers of new homes — any homebuyers purchasing a property with little or no down payment, as is common with FHA and VA-backed loans, can find themselves with “negative equity” if their home declines in value.
Falling home prices left 875,000 homeowners underwater nationwide as of Sept. 30, according to ICE Mortgage Technology’s November 2025 Mortgage Monitor.
FHA, VA loans more likely to be ‘underwater’
Source: ICE Mortgage Monitor, November 2025.
At 1.6 percent, the U.S. negative equity rate is the highest it’s been in three years, but still around its historical average. The negative equity rate peaked at well above 20 percent during and after the Great Recession of 2007-2009.
ICE’s data shows that loans originated in 2024 have the highest negative equity rates — 21.4 percent for VA loans taken out last year, and 13 percent for FHA loans originated in 2024.
That’s because prices in many markets were still hitting their peaks, and because recent borrowers haven’t had as much time to pay down their mortgage balances.
Loans backed by Fannie Mae and Freddie Mac or made by “portfolio” lenders who keep the loans on their books have lower negative equity rates — 0.4 percent for Fannie and Freddie and 1.1 percent for bank-held loans, ICE data shows.
But research by the American Enterprise Institute suggests that the mortgage rate discounts offered by homebuilders are adding to the problem by inflating new home prices.
Researchers at the AEI Housing Center estimate that the prices of new homes sold by the largest 21 builders have appreciated about 6 percent more than existing homes and new homes sold by smaller homebuilders.
“This gap implies that the use of permanent buydowns has enabled the largest builders to avoid a 10-12 percent price cut on those homes with a buydown,” AEI’s Sissi Li and Edward Pinto wrote in an analysis published Wednesday. “Without these incentives, new home prices would likely have mirrored the decline in the existing home sales market.”
Mortgage rate buydowns the norm for big builders
Share of homebuilder loans offering rate buydowns. Source: American Enterprise Institute.
AEI researchers estimate that about two-thirds (64 percent) of new homes sold by the largest builders provided permanent rate buydowns, which — thanks to a loophole — often don’t count as seller concessions.
It’s harder for smaller homebuilders to take advantage of the loophole, in which builders pay a “bulk forward commitment” fee to gain access to a large pool of mortgage funding at a lower rate, AEI said.
Fannie Mae and Freddie Mac limit seller concessions 3 to 9 percent of the purchase price, and FHA sets a limit of 6 percent in most cases.
The AEI Housing Center estimates that 2/3 of FHA loans to new homebuyers and 1/4 of loans backed by Fannie and Freddie exceed the 6 percent limit on seller concessions.
“Given the extensive use of these buydowns and their effect on new home prices, it is time for the GSEs [Fannie and Freddie] and the FHA to end this exemption,” Li and Pinto concluded.
In an Oct. 5 Truth Social post, President Trump claimed that homebuilders “are sitting on 2 million empty lots” and that he’s “asking Fannie Mae and Freddie Mac to get big homebuilders going.”
The head of Fannie and Freddie’s regulator, the Federal Housing Finance Agency Director Bill Pulte, told an industry publication last month that the FHFA is reviewing builder pricing, liquidity flows, and potential mortgage fraud risk data tied to loans the mortgage giants.
Where borrowers are ‘underwater’
Source: ICE Mortgage Monitor report, November 2025.
ICE data shows that borrowers in markets where prices are falling, like the South and Southeast, are more likely to be underwater.
In Cape Coral, Florida, where ICE data shows prices are down 15 percent from peak, 11 percent of homes with mortgages are underwater. Prices have fallen 21 percent from peak in Austin, Texas, leaving 7 percent of borrowers owing more than their homes are worth.
A 23 percent jump in third-quarter foreclosure starts brought the total number of homes in active foreclosure nationwide to 222,000, an 18 percent increase from a year ago.
FHA loans now account for 38 percent of active foreclosures, and the resumption of VA foreclosure activity following last year’s moratorium “is largely responsible for the remainder of the recent growth,” ICE reported.
During the housing boom that preceded the 2007-2009 Great Recession, another homebuilder affordability tool — seller-funded down-payment assistance — contributed to losses that led to a taxpayer bailout of the FHA Mutual Mortgage Insurance Fund.
Loans involving seller-funded down-payment assistance made up more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier. Lifetime claim rates for those loans were more than double the 12 percent rate for other high-loan-to-value FHA-backed loans, Inman reported at the time.
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