The percentage of American homeowners a mortgage that was seriously underwater fell to 15 percent in the third quarter of 2014 RealtyTrac said on Thursday.  There were 8.1 million properties with mortgages that met the company's definition of seriously underwater - where the combined loan amount of the homes mortgage(s) is at least 25 percent higher than the properties market value.  The combined market value of negative equity in these properties is an estimated $1.4 trillion.

In the second quarter of 2014 there were an estimated 9.1 million residential properties in a negative equity situation or 17 percent of all mortgaged homes.  The new third quarter figures were the lowest since RealtyTrac began following the issue in the first quarter of 2012.  Negative equity, which is a leading indicator of the possibility of foreclosure and seriously dampens a homeowner's ability to refinance or sell the property, peaked according to RealtyTrac's data in the second quarter of 2012 at 12.8 million properties or 29 percent.

The company said that there were an additional 8.5 million properties or 16 percent of those with a mortgage that were borderline, treading water one might say, with current loan-to-value ratios of 90 to 110 percent.  These properties could soon emerge out of underwater status or slip back under depending on the direction of home prices.

Properties that RealtyTrac calls equity rich because the homeowners have more than 50 percent equity increased to 10.8 million units or 20 percent, up from 9.9 million and 19 percent in the second quarter.  Positive equity in these cases is estimated at $2.9 trillion.

Fewer distressed properties were underwater in the third quarter; the percentage of such homes in the process of foreclosure dropped from 56 percent in the third quarter of 2013 and 44 percent in the second quarter of 2014 to 39 percent in the most recent quarter while the percentage with positive equity rose 4 percentage points to 38 percent quarter-over-quarter. 

"The decrease in underwater properties is promising but the estimated $1.4 trillion in negative equity means that the flood waters are not receding as quickly as they were before, corresponding to slowing home price appreciation," said Daren Blomquist, vice president at RealtyTrac. "Slower price appreciation means the 8 million homeowners seriously underwater could still have a long road back to positive equity.

"We wanted to paint a picture of the typical seriously underwater homeowner and what we found was that homeowners who bought or refinanced during the housing bubble (2004 to 2008), own a home worth less than $200,000, live in the Sun Belt or Rust Belt and live in a Democratic Congressional District were more likely to be seriously underwater," Blomquist noted. "On the other end, the highest percentages of equity rich homeowners were those who bought or refinanced between 1994 and 1998, those with properties valued at $500,000 or more, live in NY, CA, DC and these folks also tend to live in Democratic Congressional districts."

States with the highest percentage of residential properties seriously underwater in the third quarter of 2014 were Nevada (31 percent), Florida (28 percent), Illinois (26 percent), Michigan (25 percent), and Rhode Island (22 percent).  

Not surprisingly the loan vintage most likely to be seriously underwater was the era of the housing bubble, from 2004 -2008.  On the other end, the highest percentages of equity rich homeowners were those who bought or refinanced between 1994 and 1998.  Lower priced homes, those valued under $200,000, were the most likely to be underwater while those valued over a half-million dollars had the lowest percentage of serious negative equity and were the most likely to be "equity rich."

Wells Fargo was the originator of the largest number of those loans that are seriously underwater although US Bank has the highest percentage.  And, while it seems totally irrelevant, RealtyTrac also says that homes located in Congressional districts represented by a Democrat are most likely to have a higher percentage of both underwater and equity rich homes than those represented by a Republican which tend to be in the middle of the pack.