More than 8.3 million US mortgages, or 20% of all mortgaged properties, had negative equity at the end of 2008, according to a new report by Loan Performance, a company that tracks mortgage data.

More than 2.2 million, or 5.3%, of all mortgaged properties are in a severe negative equity position with loan-to-values (LTVs) of 125% or more. California leads the pack with the most property owners with negative equity (1.9m), followed by Florida (1.3m), Texas (498,000), Nevada (170,000), Michigan (128,000) and Arizona (122,000). These areas are severely affected by loans that are 125% or higher than the value of the property are in five states.

This is of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes into negative equity.

The negative equity conundrum appears poised to get worse. Loan Performance calculated that there are another two million houses that are approaching the danger zone, that is, within 5% of being in a negative equity position.

In states where unemployment is high and rising, such as Michigan, the problem of upside down mortgages is acute. For states that haven’t seen a widespread problem in declining prices and therefore upside down mortgages, the worst may be in store.

The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all US mortgages. The data was filtered to include only properties valued between $70,000 and $1.25m.