Roughly 22.7% of all residential properties encumbered with a mortgage had negative equity at March 31, a slight improvement over yearend when the reading was 23.1%, according to new figures released by CoreLogic.

But mortgage bankers and realtors shouldn’t be celebrating quite yet. In a report released Tuesday morning the analytics firm noted that the better showing is primarily due to small improvements in the hardest hit states – Nevada, Arizona and Florida – while a majority of states either remained unchanged or had minor increases in “underwater” loans.

Moreover, CL noted that underwater second liens are a growing problem. The firm said nearly 40% of borrowers with home equity loans are underwater and owe more than their house is worth -- compared to 18% of borrowers who have no second.  

A negative equity borrower with no second is upside down by an average of $52,000, versus $83,000 for a mortgagor with a HELOC, CL said.

“Many borrowers in negative equity are still able and willing to make their mortgage payments,” noted CL chief economist Mark Fleming. “Those in negative equity and impacted by an income shock of some kind, such as a job loss, divorce, or death, are much more likely to be at risk of foreclosure or a short sale.”

At March 31, Nevada continued to lead the nation in negative equity with 63% of mortgaged properties underwater. Arizona ranked second (50%), followed by Florida (46%), Michigan (36%), and California (31%).

The negative equity share in the top five states was 39% percent, down from 40% at the end of 4Q, the firm said.

“The current economic indicators point to slow yet positive economic growth, which will slowly reduce the risk of borrowers experiencing income shocks,” said Fleming. “Yet the existence of negative equity for the foreseeable future will weigh on the housing market recovery by holding back sale and refinance activity.”

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