By Mike Colpitts
The number of homeowners underwater on mortgages reached 11.1 million during the final quarter of 2011, representing 22.8% 
of U.S. residential properties, according to real estate data firm CoreLogic. The increase marks a surge of 400,000 mortgage holders who are upside down on mortgages from the previous quarter.
Declining home values in the majority of the U.S. trouble the housing market, with foreclosures forecast to climb during 2012. An additional 2.5 million mortgage borrowers had less than 5% equity in their homes, which are referred to as near negative equity borrowers. Underwater and near negative equity homeowners combined to make up 27.8% of residential mortgages, up from 27.1% at the end of the third quarter.
Of the 11.1 million properties that are underwater there are 4.4 million with home equity loans or second mortgages on their properties. This group of borrowers is most likely to default on their mortgages with an average loan balance of $219,000, underwater by an average of $51,000 or a loan-to-value ratio of 130%.
Total combined outstanding mortgage debt in negative equity increased to $2.8 trillion, the largest amount since the housing downturn began more than five years ago. The recent increase in job hiring should help some mortgage holders in default to catch up on mortgages, but not without delays as they wait for pay checks from new employers.
“The high level of negative equity and inability to pay is the double trigger of default and the reason we have such a significant foreclosure pipeline,” said CoreLogic chief economist Mark Fleming. “While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve.”
The state that has had the highest volume of foreclosures, Nevada also experienced the highest negative equity percentage with 61% of its mortgaged properties underwater. Arizona placed second in negative equity homeowners with nearly half or 48%.
Florida, where one in three properties is expected to either be foreclosed or to be sold as short sales during the housing crisis mainly because so many are vacation homes had 44% currently underwater. Michigan, which has been hard hit as a result of the auto industry, had 35% upside down, and Georgia saw 33% of its homes and other residential properties underwater.
Given the current rate of deflation in the hardest hit housing markets, negative equity is likely to reach more than 15-million homeowners by the end of 2014, according to analysts. The hardest hit five states have a combined negative equity share of 44.3%, while the rest of the nation has an average negative equity share of just 15.3%.