A smaller percentage of U.S. homeowners were saddled with underwater mortgages in the second quarter as more homes entered the foreclosure process even as price declines slowed, real estate website Zillow.com said on Monday.

Fewer homeowners with so-called underwater mortgages -- where the amount owed on the mortgage exceeds the home's value -- is nevertheless a positive for the housing market as it could portend fewer defaults and foreclosures down the road.

The percentage of American single-family homes with mortgages in negative equity fell to 21.5 percent in the second quarter from 23.3 percent in the first quarter and 23 percent a year ago, according to the Zillow Real Estate Market Reports.

These underwater mortgages are one of the biggest banes of

homeowners since negative equity makes many of them unqualified for home loan refinancing and prevents some from selling.

While fewer homeowners were underwater in the second quarter than the first, it is not yet time to break out the champagne bottle, Stan Humphries, Zillow chief economist, told Reuters in an interview.

While some of the downward pressure on negative equity is coming from stabilization in home value trends, the larger factor is the enormous volume of foreclosures occurring within the stock of homes in negative equity, he said.

Indeed, through the foreclosure process, negative equity is squashed, but at the cost of another homeowner losing their home, he said.

Since national home values are projected to continue to fall until later this year, this will keep negative equity rates fairly high, he said.

In the second quarter, U.S. home values were down 3.2 percent year-over-year and down 0.6 percent quarter-over-quarter, to $182,500, according to the Zillow Home Value Index. It was the 14th consecutive quarter of year-over-year declines.

The national rate of decline decelerated from the first quarter, marking the second consecutive quarter of slowing declines.

Nevertheless, home values declined year-on-year in 99 of 144 metropolitan statistical areas, or MSAs, tracked by Zillow.

SOME SUNSHINE IN CALIFORNIA

But home values in 20 of the 26 California markets tracked by Zillow showed quarter-over-quarter increases in home values, and 10 showed year-over-year increases. Five MSAs, including Los Angeles, San Francisco and San Diego, marked their fifth consecutive quarter of increasing home values.

California markets benefited from both federal and state home buyer tax credits and these double tax credits stimulated housing demand there and are partly responsible for the rapid -- and likely unsustainable -- rates of appreciation in many markets across the state, Humphries said.

Nationally, second-quarter numbers were still heavily influenced by the federal homebuyer tax credits. Recent trends in home values suggest the nation could reach a bottom in the latter half of 2010, he said.

Home sales have fallen since the expiration of government tax credits at the end of April. To take advantage of them, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

Meanwhile, foreclosures again reached a new peak in June, with more than one out of every 1,000, or 0.11 percent, U.S. homes being foreclosed upon during the month -- the highest since Zillow began recording national foreclosure data in 2000.

Additionally, for more than one-fourth, or 26 percent, of home sales nationwide, the home was sold for less than what the seller originally paid.

Foreclosure re-sales fell in June, making up 16.9 percent of all U.S. home sales during the month, down from a 2010 high of 19.8 percent in February.

June foreclosure resales made up the majority of sales in several metropolitan areas, including El Centro, California, at 55.8 percent; Madera, California, at 54.6 percent, and Merced, California, at 53.6 percent, the reports showed.

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