The housing data company RealtyTrac is releasing its fourth quarter report on residential properties that are deeply underwater, meaning they are worth at least 25 percent less than the properties are worth. Vice President Darren Blomquist said 23 percent of the homes in Arizona fall into that category, down from 27 percent in the third quarter.

“That four percentage decrease represented 68,000 homeowners in Arizona who were underwater three months ago but no longer are seriously underwater," said Blomquist.

He said Arizona’s numbers remain high. Nationally, 19 percent of the homes are deeply underwater, and he said while price appreciation in the state will likely slow in the months ahead, he expects to see the number of homes that are deeply underwater continue to go down.  For now though, Blomquist said those homes are holding back a more broad-based Arizona housing recovery. 

Arizona’s housing market continues to improve, but the figures released show there is still a long way to go. The appointment this week of North Carolina Rep. Mel Watt to head the Federal Housing Finance Agency could be a wildcard in the process. Blomquist said Watt is a big supporter of loan modification on Fannie MAE and Freddie MAC mortgages.

“If he shifts that policy and allows for principal balance reductions on Fannie and Freddie loans, that could really accelerate the trend downward in negative equity as people don’t just have to rely on price appreciation but in some cases they could actually get the balance of their loan reduced," Blomquist said.

Blomquist said that would allow holders of the loans to get out of their negative equity right away.

Updated 1/9/2014 2:47 p.m.