The number of U.S. homes worth less than the debt owed on them dropped in the third quarter, largely because of mounting foreclosures rather than a rise in property values, according to CoreLogic Inc.

About 10.8 million homes, or 22.5% of those with mortgages, were underwater as of Sept. 30, the Santa Ana, Calif., real estate information company said in a report Monday. That was down from 11 million, or 23%, at the end of June, the third straight quarterly decline.

Falling property values and unemployment near 10% have caused a surge in foreclosures. The number of homes offered in foreclosure auctions averaged 110,000 a month in the third quarter, compared with about 98,000 in that period a year earlier, said Mark Fleming, CoreLogic's chief economist.

"There are two ways to reduce negative equity," Fleming said. "Price appreciation or disposition, which means people getting taken out of their homes. At the moment, there's more disposition."

A further decline in prices threatens to increase the number of homeowners with negative equity, Fleming said.

Negative equity discourages homeowners from maintaining their property or their payments, "because their financial interest [the equity] has disappeared and has only a small prospect of returning soon," CoreLogic said.

About 2.4 million borrowers had less than 5% equity in their home from June through September, bringing the total amount of mortgaged homes underwater or near negative equity to 27.5%.

In Nevada, 67% of homes with mortgages were underwater in the third quarter, more than any other state. It also has the highest rate of foreclosure filings, with one in 79 households receiving a notice of default or foreclosure in October, according to RealtyTrac Inc. of Irvine, Calif.

Arizona had the second-highest percentage of underwater homes, 49%, followed by Florida at 46%, Michigan at 38% and California at 32%, CoreLogic said.

States with the lowest rate of underwater homes were Oklahoma at 5.8%, New York at 7.1%, Pennsylvania at 7.3%, North Dakota at 7.4% and Montana at 7.7%.

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