Underwater mortgages rise: Nearly a quarter of borrowers affected

Underwater mortgages rose to 23 percent at the end of 2010. In Nevade, underwater mortgages account for roughly two-thirds of home loans.

The number of Americans who owe more on their mortgages than their homes are worth rose at the end of last year, preventing many people from selling their homes in an already weak housing market.

About 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater in the October-December quarter, according to report released Tuesday by housing data firm CoreLogic. That's up from 22.5 percent, or 10.8 million households, in the July-September quarter.

The number of underwater mortgages had fallen in the previous three quarters. But that was mostly because more homes had fallen into foreclosure.

Underwater mortgages typically rise when home prices fall. Home prices in December hit their lowest point since the housing bust in 11 of 20 major U.S. metro areas. In a healthy housing market, about 5 percent of homeowners are underwater.

Roughly two-thirds of homeowners in Nevada with a mortgage had negative home equity, the worst in the country. Arizona, Florida, Michigan and California were next, with up to 50 percent of homeowners withmortgages in those states underwater.

Oklahoma had the smallest percentage of underwater homeowners in the October-December quarter, at 5.8 percent. Only nine states recorded percentages less than 10 percent.

In addition to the more than 11 million households that are underwater, another 2.4 million homeowners are nearing that point.

When a mortgage is underwater, the homeowner often can't qualify for mortgage refinancing and has little recourse but to continue making payments in hopes the property eventually regains its value.

The slide in home prices began stabilizing last year. But prices are expected to continue falling in many markets due to still-high levels of foreclosure and unemployment.

That means homes purchased at the height of the real estate boom are unlikely to recover lost value for years.

Underwater mortgages also dampen home sales. Homeowners who might otherwise sell their home refuse to take a loss or can't get the bank to agree to a short sale — when a lender lets a borrower sell their property for less than the amount owed on the mortgage.

Home sales have been weaker in areas where there are a large number of homeowners with negative equity.

Many banks are also requiring homebuyers to put as much as 20 percent of a home's value as down payment and the Obama administration is pushing for a 10 percent down payment requirement on all conventional loans guaranteed by the ailing mortgage giants Fannie Mae and Freddie Mac.

Few homeowners in states hit hard by foreclosures, including Colorado, Georgia and Nevada, have 20 percent or more equity in their homes. Higher down payments make it increasingly difficult for those people to sell their homes.

The total amount of negative equity increased to $751 billion nationwide, up from $744 billion in the previous quarter.