Many underwater homeowners hampered by high interest rates

Of the 10.9 million underwater mortgages at the end of the second quarter, 3 out of 4 had interest rates above the market rate, CoreLogic data show. Economists say the combination is more likely to lead to foreclosure.

The vast majority of Americans with mortgages worth more than their homes are also stuck with high-interest-rate loans, putting them in precarious financial situations, according to data released Tuesday.

A total of 10.9 million homes with a mortgage were in a negative equity position at the end of the second quarter, constituting 22.5% of all residential properties with a mortgage, according to Santa Ana research firm CoreLogic. That was only a slight decline from 22.7% during the first three months of the year. And of those "underwater" homeowners in the second quarter, 3 out of 4 were paying interest that was above the market rate, the data show.

Economists consider high mortgage payments on homes that are underwater, or worth less than the debt owed on them, to be more likely to lead to foreclosure. Homeowners in this situation can feel hopelessly trapped and more willing to give up paying.

"High negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery," CoreLogic Chief Economist Mark Fleming said in a statement. "The hardest-hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices."

In Los Angeles County, there were 356,677 homes underwater, making up 23.2% of all homes with mortgages.

Negative equity keeps borrowers from being able to refinance and benefit from current low interest rates. It also restricts home sales because would-be sellers and move-up buyers remain stuck in their homes.

The share of negative-equity properties in the hardest-hit states has improved, CoreLogic said, but the primary reason was because borrowers lost their homes to foreclosure, which removed the homes from the market.

Compared with the second quarter of 2010, the average negative-equity share for the top five states combined declined to 38% from 41%. Nevada had the largest decline, falling from 68% of homes in a negative equity position to 60%.

President Obama, in his address to Congress last week, said that helping homeowners refinance their loans could free up a considerable chunk of spending each year for families. Mortgage rates have dived to historic lows amid concerns the economy is sinking again.

In response, the Federal Housing Finance Agency, which oversees mortgage titans Fannie Mae andFreddie Mac, said in a statement last week that it would review its policies to see whether more homeowners would qualify for the administration's Home Affordable Refinance Program. The program covers only mortgages originated before June 2009 and owned or guaranteed by Fannie Mae or Freddie Mac.