Almost one-third of home loans under water

Note: But the number of negative-equity mortgages drops slightly from prior quarter

A slowing in the pace of home-price declines helped bring down the portion of home-loans with negative equity -- the situation where borrowers owe more on their mortgage than their home is worth -- according to data from First American CoreLogic.

More than 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a negative-equity position on June 30, edging down from 32.5% at the end of March, according to the real-estate information company, which tracks data on about 90% of mortgage loans nationwide.

The aggregate property value for loans in a negative-equity position was $3.4 trillion.

Negative equity can occur because of a decline in property value, an increase in mortgage debt or a combination of both. Equity levels are important to people who can't make their mortgage payment since it affects their ability to sell or refinance, said Mark Fleming, chief economist for First American CoreLogic.

The slight drop in the portion of under-water loans reflects the recent flattening of home price changes, which is "great news" for the housing market as negative equity has been increasing for a number of periods, Fleming said.

Still, he stressed that this decrease is a quarterly comparison, not the yearly comparison typically used in house prices.

Negative equity is a strong driver of foreclosures, Fleming said, and the stunted growth rate in the second quarter is a positive sign that foreclosures may moderate in the future. First American CoreLogic made "very crude" estimates that the foreclosure rate will peak a bit higher than 4% in early 2010, he said.

Geographic concentration Distribution of negative equity is heavily skewed geographically. Just three states -- Nevada, Arizona and Florida -- account for about half of all mortgage borrowers in a negative-equity position, according to the company's data. Michigan and California round out the top five states.

In Nevada, 66% of the state's mortgages are under water; in Arizona, the portion under water is 51%; in Florida, 49%; Michigan, 48%; and California, 42%.

Nationwide, the total property value for loans in a negative-equity position was $3.4 trillion. California led states with $969 billion, followed by Florida with $432 billion, New Jersey and Illinois each with $146 billion and Arizona with $140 billion.

Looked at by city, Los Angeles topped the list with more than $310 billion of total property value under water, followed by New York with $183 billion, Miami with $152 billion, Washington with $149 billion and Chicago with $134 billion.

It's not over yet Though the decrease of negative equity is good news, it's by no means an end to the housing market's problems, Fleming said.

"The water is 4 feet deep in the living room, which is not good," he said. "But it has crested and it's not going toward 4 [feet], as indicated by that spring buying season and moderated prices."
Fleming said it's possible that overall affordability, government programs and the stimulus helped people jump off the sidelines into the housing market in recent months. He added that price declines might reappear in the fall and winter based on the housing market's seasonal cycle.

The current data may help bolster consumer confidence, he added, because of the psychologically-driven nature of the U.S. economy.

"As long as the economy continues to pull itself out of the doldrums," Fleming said, people "will be much more likely to [buy] again next spring."

Emily Glazer, MarketWatch