NEW YORK ( TheStreet) -- On the back of rock bottom interest rates and a recovery in housing, banks extended the most home loans since 2007, according to Lender Processing Services' latest Monthly Mortgage Monitor report. About 8.6 million new loans were originated in 2012, up 34% year-on-year. That is still way below historical standards and is still primarily backed by government-sponsored Fannie Mae, Freddie Mac and the Federal Housing Administration. The agencies now back 84% of all originations, compared to 69% in 2007 and 52% in 2005. Still, the trend over the last four years suggests "a slowly resurgent non-agency lending market," according to Herb Belcher, Senior Vice President at LPS Applied Analytics. His remark echoes comments by participants at a recent conference organized by the American Securitization Forum. Private investors are likely to buy more mortgages in 2013, though no one expects the scale to be anywhere near the levels at the peak . The other promising news from the report is for underwater borrowers -- those who owe more than their properties are worth -- who are still current on their payments. Negative equity declined 35% in 2012, as home prices staged a broad recovery. That has not only helped pull more borrowers from under water- allowing them an opportunity to sell- but also made more underwater borrowers eligible for refinancing. About 4 million loans that would not have been eligible for traditional refinancing last year may be eligible today according to the report. Another 3.4 million are at the cusp of the conforming threshold and stand to benefit if housing prices continues to rise. About 2.9 million borrowers remain eligible under the government's expanded HARP(Home Affordable Refinance program.) Of course, this is all good news for banks with strong mortgage operations notably Wells Fargo ( WFC), PNC Financial Services ( PNC), and US Bancorp ( USB). These banks have been riding the refinancing wave, with origination fees offsetting some of the margin pressure from low interest rates. Mortgage delinquency rates, meanwhile, are down 32% from the peak, while the national foreclosure inventory has also started to decline, though some states are still seeing increases. -- Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: email@example.com.