What is a potential risk for homeowners with underwater mortgages?

Homeowners with underwater mortgages face a significant risk because their mortgage balance exceeds the current market value of their home. This situation creates a financial disadvantage, as it limits the homeowner's ability to sell the property or refinance the loan without incurring a loss. If they attempt to sell, they would have to bring cash to the closing table to cover the difference between what is owed on the mortgage and the sale price, which is typically lower than the mortgage balance. Additionally, refinancing becomes challenging because lenders are generally unwilling to approve new loans that exceed the property’s assessed value. As a result, homeowners may be "stuck" with their mortgage and may struggle to make necessary financial changes, leading to further financial strain.