The latest First American data aren't comparable to previous estimates because the company revised its methodology. First American now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down.
The changes reduced the total number of borrowers under water-although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.
Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.
More than 40% of borrowers who took out a mortgage in 2006-when home prices peaked-are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value.
Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.
Andrew Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000.
"I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest."
Borrowers with negative equity are more likely to default if they live in a state where the bank can't pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond.
But borrowers who are less than 20% under water are likely to maintain their mortgage if their loan is modified and the payments reduced, said Sanjiv Das, head of Citigroup's mortgage unit. "Beyond 120%, the most effective modification is a complete loan restructuring, including a principal reduction."
Mortgage companies have been reluctant to reduce mortgage principal over worries about "moral contagion, with people not paying their mortgage or redefaulting because they believed the bank would reduce their principal," Mr. Das said.