More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.
That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.
It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.
As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity - in which the outstanding loan balance exceeds the value of the home - were FHA-insured mortgages, according to CoreLogic.
Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.
Even for loans taken out in December - less than four months ago and the last month for which data is available - nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.
"The overwhelming majority of the U.S. is still seeing home prices decline," said CoreLogic senior economist Sam Khater. "Many borrowers continue to be quickly wiped out."
The problem is not uniform around the country. In some areas, such as Washington, D.C., Miami and parts of northern California, prices are on the rise.
CoreLogic predicts the overall U.S. housing market will finally bottom out this year.
And the number of homeowners falling under water each month has decreased significantly since the peak of the financial crisis in 2008 and early 2009.
Still, Khater said, since October 2010 average home prices have fallen 7.4 percent. Overall, CoreLogic data shows that 11.1 million, or 22.8 percent, of U.S. residential properties with a mortgage are in negative equity, unchanged from the summer of 2010.
According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major U.S. metropolitan areas, U.S. home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines.
CoreLogic says a significant factor causing recent home loans to slide under water has been the availability of government-insured mortgages that require only a small down payment.
These loans, insured by the FHA, require a down payment of as little as 3.5 percent of the purchase price, providing only a small cushion of protection against a drop in home prices that could drive a borrower into negative equity.
"This is creating a new wave of under water borrowers," said Gary Shilling, a veteran financial analyst and well-known housing market bear. "We have all three branches of government trying to keep people in four bedroom houses who can't afford chicken coops."
The U.S. Federal Reserve, in report delivered to Congress in January, estimated that 12 million American homeowners had negative equity. Of those, the Federal Reserve said, 3 million were borrowers with FHA-insured loans.
CoreLogic's Khater said: "Low down payment lending in a weak housing market and weak economy begs the question whether we are setting up the FHA to have a multitude of failures down the line."
Jason Opalka took out an FHA-backed loan on his two-bedroom property in the suburbs of Orlando, Florida, in August 2010. He was helped by Certified Mortgage Planners of Orlando, who negotiated the FHA-backed loan with the lender, Freedom Mortgage, based in New Jersey.
Opalka was refinancing another FHA-backed loan he had obtained in 2008, for $196,000, then at an interest rate of over 6 percent.
Under the refinancing, he borrowed $192,278 at an interest rate of 4.5 percent. Opalka, looking at the paperwork, is still surprised at the down payment he had to make in 2010, for a property valued at the time for little more than the loan was worth and in which he had almost no equity.
His down payment was just $3,000 - or about 1.5 percent of the total loan.
Less than two years later, local real estate estimates now value Opalka's home at no more than $110,000.
"I'm at least $80,000 under water," Opalka told Reuters. "We never expected to go under water. We never expected prices to fall like they have. We definitely didn't see this coming. If I'd known this, we probably would have rented."
Florida has seen one of the greatest drops in house values since the housing crash of 2008, 30 percent on average since October 2010 and over 50 percent since the height of the bubble in 2006, according to Case-Shiller.
FHA-insured loans were begun during the Great Depression and have traditionally been used to enable lower income Americans to get mortgages.
Historically, FHA loans accounted for 8 percent to 12 percent of the mortgage market. According to the FHA, this rose to 30 percent in late 2009 and to about 50 percent for first-time buyers at the height of the financial crisis.
FHA officials say they are deliberately reducing their market share of loans as the private sector increases its lending. The agency share of home loans is today down to about 25 percent, and will continue to fall, officials say.
Charles Coulter, a deputy assistant secretary in the U.S. Department of Housing and Urban Development, which oversees the FHA, said it was the FHA's mission to provide affordable housing, particularly in times of financial crisis when private sector financing dries up.
"We are the only opportunity for borrowers who can't come up with a 5, 10 or 20 percent down payment to get a home," Coulter said.
He said the size of down payments was "an important risk parameter, it's something we have been evaluating and a factor we will continue to evaluate."
Coulter said beginning in 2009, FHA took a number of steps to tighten qualification standards for the government-insured loans.
In January 2009, the minimum down payment for an FHA loan rose from 3 percent to 3.5 percent, and the upfront premium for mortgage insurance has also been raised.
In October 2010, only borrowers with a credit score of 580 or above could get a loan with a 3.5 percent down payment. Those with credit scores between 500 and 579 faced a 10 percent down payment. Those with credit scores below 500 do not qualify for an FHA loan.
FHA officials say the credit score of the agency's average borrower is 700.
A Fair Isaac Corporation score - known as FICO and the standard evaluation of creditworthiness in the United States. - of less than 620 is usually considered sub-prime.
Manny Bongiovanni, a mortgage broker in Phoenix, who has processed mainly FHA-backed loans in recent years, said most such loans were issued at a 30-year, fixed low interest rate.
"Most of the people I have dealt with have ended up paying less on their monthly mortgage payments than they were when they rented. The good thing is, we have got lots of young families into these homes.
"And if they stay put, they will eventually get equity."
(Editing by Jonathan Weber, Martin Howell, Leslie Adler)