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1 in 5 mortgages 'underwater'

Report shows uptick in Americans with mortgages whose property values are less than what the borrowers owe.

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By Julianne Pepitone, CNNMoney.com contributing writer

Is President Obama right to say stocks may be a good long-term investment?
  • Yes, prices are low enough to buy
  • No, the market will be down for a long time

NEW YORK (CNNMoney.com) -- The dramatic decline in the housing market has hit Americans hard: 20% of people with mortgages owe more than their home is worth, according to a report released Wednesday.

More than 8.3 million U.S. mortgages were "underwater" as of December, said research firm First American CoreLogic. Three months earlier, 18% were underwater.

The phenomenon is exploding beyond bubble markets such as California, Florida, Arizona and Nevada, according to Sam Khater, senior economist for CoreLogic.

"As of December, home prices are declining in 75% of all metro markets, up from a third of those markets last March," Khater said.

Another 2.2 million homeowners are within 5% of negative territory, according to CoreLogic. These borrowers are prime candidates for refinancing under President Obama's foreclosure prevention plan.

Details on Obama's plan are expected to be released Wednesday. The administration has indicated that the plan will allow borrowers with between 80% and 105% loan-to-value ratios - near underwater and slightly underwater borrowers - to refinance their conforming loans, allowing many to lower their mortgage payments.

Anyone who is more underwater may qualify for a loan modification, where monthly mortgage payments would be reduced to 31% of gross income.

State totals: Of all the states, California has fared the worst. Homeowners in the beleaguered state lost more than $1.2 trillion in housing value last year, accounting for roughly half of the national decline.

California also led in the number of underwater borrowers: 1.9 million. It was followed by Florida (1.3 million), Texas (497,000), Michigan (459,000) and Ohio (435,000).

Those five states comprised more than 50% of the country's negative equity mortgages, the report said.

According to the CoreLogic report, home prices show little sign of stabilizing but declines in some of the worst-hit markets, such as the Central Valley of California, have recently lured buyers looking for bargains. But demand has not grown enough to boost prices, according to Khater.

"The supply must be whittled down more before prices can begin to stabilize," he said.

Outlook: As of the end of 2008, the total value of residential properties was $19.1 trillion, down $2.4 trillion from December 2007.

The report speculated that, over the next few months, the largest increase in underwater borrowers will come in states that have yet to record big home-price declines. The bubble states already have such high percentages of underwater borrowers and prices have fallen so far that only incremental increases should occur.

But the pace should quicken in states, such as New York, New Jersey, Montana and Hawaii, in which underwater borrowers still only account for fewer than 10% of all loans. To top of page

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