A recovery in home prices has certainly helped to turn around the fortunes of many homeowners. The average U.S. home price jumped nearly 14% year-over-year through October (the latest data available), according to the S&P/Case-Shiller home price index. That has added thousands of dollars to the average home's value.
An increase in home equity typically means fewer foreclosures, said Daren Blomquist, a spokesman for RealtyTrac. "Negative equity is the foundation that foreclosures are built on, but you need another event -- a job loss or illness, for example -- to trigger a foreclosure," said Blomquist.
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The more deeply underwater borrowers are, the more likely they are to conclude that it makes little sense to continue to pay off their loans when money is tight. "It takes away their motivation to save their properties," said Blomquist.
They also have one less financial asset to tap into should they hit a financial rough patch.
And it makes it harder to sell the home. Borrowers typically have to do a "short sale," which is subject to the approval of their lender. If they can't get a short sale approved, they could end up in foreclosure.
Even though far fewer people are underwater on their homes than last year, it doesn't mean the foreclosure crisis is completely over.
read more: http://money.cnn.com/2014/01/09/real_estate/underwater-mortgages/