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Are Underwater Mortgages Too Close to the Deep End?

The number of Americans who owe more on their mortgages than their homes are worth declined in the first three months of the year, aided by a modest rebound in U.S. home prices.

Peter Gridley | Photographer's Choice | Getty Images

But homes with so-called underwater mortgages still made up about 11 million properties — just under a quarter of all U.S. homes with a mortgage, CoreLogic said Thursday.

While improving, the number of underwater mortgages remains far higher than in a healthy housing market, when about 5 percent of home loans are underwater.

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.

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.

Underwater mortgages typically rise when home prices fall, and vice versa.

Low mortgage interest rates have helped drive home sales higher this year, fueling price increases. In some markets, a lack of homes for sale has led to those on the market receiving multiple offers.

U.S. home prices rose in 19 of 20 major U.S. cities in April from March, according to the Standard & Poor's/Case-Shiller index. That was the second straight month that prices rose in a majority of the cities tracked by the index. A measure of national prices registered an increase of 1.3 percent — the first gain in seven months.

Still, home sales remain far below healthy levels, and analysts say it could be years before the housing market returns to full health. And some economists expect home prices could weaken again later this year, if the U.S. economy slows further.

Another factor likely to weigh down home prices in coming months: foreclosures.

The number of homes entering the foreclosure process increased on an annual basis in May and June, according to RealtyTrac Inc. The trend is expected to continue, setting the stage for a potential rise in bank-owned homes that could hit the market sometime next year.

All told, 11.4 million U.S. homes had an underwater mortgage in the first quarter, CoreLogic said. That amounts to 23.7 percent of all homes with a mortgage.

In the last three months of 2011, there were 12.1 million homes with underwater mortgages, or 25.2 percent of all U.S. homes with a mortgage, the firm said.

Meanwhile, another 2.3 million borrowers had less than 5 percent equity in their home. Those homeowners are particularly at risk of seeing the value of their home fall below what they owe on their mortgage should home values weaken further.

Nevada had the highest share of underwater mortgages in the nation at 61 percent of all homes with a mortgage.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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