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Rising Prices Free Nearly 800,000 Borrowers in Third Quarter

NEW YORK (TheStreet) -- Nearly 800,000 properties were freed from "negative equity" in the third quarter, according to the latest report from CoreLogic.

As many as 6.4 million homes, or 13 percent of all residential properties with a mortgage, were still in negative equity at the end of the third quarter of 2013, down from 7.2 million homes, or 14.7 percent of all residential properties with a mortgage, at the end of the second quarter of 2013.

Negative equity means borrowers owe more than the home is worth. Borrowers become "underwater" on their mortgage when the value of their homes decline or their mortgage debt increases.

The housing bust plunged millions of homeowners underwater. These borrowers are trapped in their homes because unlike other struggling borrowers, they can't sell their homes and repay their mortgage. This also limits their ability to relocate to another city for work. They also normally have difficulty refinancing their mortgage.

The longer borrowers are underwater the higher the probability they will default, though it is worth noting that the majority of underwater borrowers remain current on their mortgage several years after the bust.

The inability of underwater borrowers to sell is also one reason why the supply of homes available for sale has been so low.

Still, the shortage of homes has been sending prices higher, which in turn frees up more underwater borrowers. According to Anand Nallathambi, CEO of CoreLogic, 3 million property owners have regained equity in their homes since the first quarter of 2013.

As more borrowers regain equity in their homes, they will finally be able to list their properties in the market, expanding the supply of homes.

But it is a long road ahead for many borrowers. CoreLogic estimates that 20.4% of all properties with a mortgage are "under-equitied", meaning they have less than 20% equity. These borrowers also have difficulty trading up to a bigger home because they lack sufficient equity for a downpayment for the next loan.

About 1.5 million property owners have less than 5% equity, which means they are in danger of going underwater if prices fall.

Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 %, followed by Florida (28.8%), Arizona (22.5 %), Ohio (18 %) and Georgia (17.8 %).

A separate estimate from Zillow puts the number of underwater homeowners at 10.8 million. Still, even Zillow's data shows that the negative equity rate is falling rapidly.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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