Research shows that almost half of all Arizona mortgages were "underwater” by the end of the first fiscal quarter of 2011. Only Nevada, at 63 percent, had a higher rate of homes with negative equity, this according to the most recent report by the private research firm CoreLogic.

Although the overall number of Arizona homeowners who were underwater outdid most in the nation, their average negative equity was $5,000 below the national average of $65,000, highlighting the large disparities in housing costs by state. For instance, in New York only 6.2 percent of mortgages were underwater but borrowers averaged $129,000 in negative equity, the highest in the nation.

The top three metropolitan areas with the most underwater mortgages included Phoenix, with 55 percent of borrowers owing more on their homes than their homes are worth. But the Arizona city trailed behind Las Vegas and Stockton, California respectively.

Overall, there was a slight decrease in negative equity nationwide owing to miniscule decreases in the hardest hit states of Nevada, Arizona and Florida. The report notes that the majority of states remained unchanged or had minor increases.

As far as the Grand Canyon State is concerned, bankers think that the bottom has already been reached and market stabilization is in the not-to-distant future. Paul Hickman, president of the Arizona Association of Bankers said. He added that the situation “can't get any worse” and that lenders are trying to avoid further foreclosures which would add to real estate surpluses. At this point, banks are trying to mitigate upkeep costs on the already 100,000 foreclosed homes throughout the state.

If, in fact, circumstances can only improve for the housing market, experts agree that recovery will be sluggish.

“The current economic indicators point to slow yet positive economic growth, which will slowly reduce the risk of borrowers experiencing income shocks,” said Mark Fleming, chief economist with CoreLogic. “Yet the existence of negative equity for the foreseeable future will weigh on the housing market recovery by holding back sale and refinance activity.”

Indeed, state housing officials are dealing with a high volume ofrequests for help with mortgage payments. “We have been seeing a lot of activity,” Shaun Rieve, a spokesman for the Arizona Department of Housing told Cronkite News.  Rieve says the problem now is that few lenders are willing to participate in the federal government's Principle Reduction Program by matching federal funds of up to 31 percent of a distressed homeowner's mortgage. Bank of America was one of the few big banks willing to come on board, he said. Chase Bank, Fannie Mae and Freddie Mac have yet to sign on, opting to offer their own loan modification and financial counseling programs to homeowners on the verge of walking away.

The state housing department has taken up the slack by redirecting $36 million in federal aid to an unemployment assistance fund that subsidizes mortgage payments (up to $2,000) for qualified unemployed homeowners. According to Rieve, the new program has been far more successful.