The number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, according to trade-industry data released Monday.

The total of so-called underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5% of U.S. homeowners with a mortgage.

The drop in underwater mortgages hardly reflects a rebound in the housing sector because home prices didn't rise in the third quarter. Rather, the number of underwater homes declined as banks took back those homes and wiped out the debt through foreclosure.

Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year.Home values could drop by an estimated $1.7 trillion this year, a 40% increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.

The figures underscore how fragile the housing market remains. As home prices fall, more borrowers will sink underwater. Another 5% decline in prices would leave an additional 2.4 million homeowners underwater, according to CoreLogic.

Underwater borrowers pose a serious risk because they are far more likely to default if they lose their jobs or meet other financial shocks. It is difficult for them to refinance and take advantage of low mortgage rates and they are unable to sell their homes unless they cover the shortfall out of savings or convince the bank to sell at a loss in what is known as a short sale.

"It's a giant anchor that's holding back the economy," said Sam Khater, senior economist at CoreLogic. "Until that negative equity recedes, the housing market is not going to recover. It's as simple as that."

How long borrowers will remain underwater largely depends on the future path of home prices.

Even assuming flat prices, roughly half of underwater borrowers are expected to still be underwater after five years, according to a May report by economists at the Federal Reserve Bank of New York. The Fed report estimates one-third of underwater borrowers will return to positive equity within three years just by paying down debt.

Many are finding themselves in the unenviable position of "accidental landlord." Matt Doebler and his wife thought they had bought at the bottom of the market when they paid $217,000 for a bank-owned home with no money down in Chantilly, Va., three years ago.

But Mr. Doebler, who teaches high school English, lost his job months later and has moved his family twice, most recently to Chattanooga, Tenn. He has rented out the two-bedroom condo for $500 less than his monthly payments. He said he hasn't missed any payments on the home, which he said is now worth less than $150,000.

Mr. Doebler, 30 years old, has begun to ask himself whether he has a moral obligation to keep paying for a home that "not only doesn't provide us shelter, but actually makes it almost impossible for us to pay our monthly living expenses," he said.

Economists say borrowers with small amounts of negative equity are likely to keep paying their mortgages absent shocks such as job loss or divorce. But if more underwater homeowners—even those who are able to make monthly mortgage payments—decide it is better to "strategically" default and abandon heavily underwater properties, distressed sales will continue battering hard-hit housing markets and impede the recovery of the overall economy.

Alicia L. Koch's condo in Sacramento, Calif., had been depreciating in value for years, but it wasn't until about six months ago that the 37-year-old single mother decided she'd had enough. She bought the three-bedroom townhouse in 2005 for $230,000 with a $1,000 down payment. It was recently appraised for about $69,000, and she said she stopped making payments in April. She is trying to offload the property in a short sale.

"I realized I could never catch up to what I owe," said Ms. Koch, who works as a program manager in information-technology training. She and her 15-year-old daughter plan to move in with her fiance, who recently bought a newly constructed home nearby.

At current rates, about one in four borrowers who owe between 100% and 120% of their home's value will ultimately default, and half of all borrowers above those levels will go into foreclosure, estimates Laurie Goodman, a senior managing director at Amherst Securities Group LP.

Efforts to modify loans through the Obama administration's Home Affordable Modification Program have largely failed to address negative equity and frequently leave borrowers further underwater, according to a report to be released Tuesday by the Congressional Oversight Panel. Borrowers in the program "have a slim chance of returning to positive equity in the foreseeable future," the report says.

The underwater problem could also weigh on housing markets because homeowners without equity are less likely to act like traditional homeowners and spend money on their homes. While the homeownership rate during the third quarter fell to 66.9%, according to U.S. Census Bureau data, the effective homeownership rate, which excludes underwater homeowners, is just 56.6%, according to CoreLogic.

That problem is particularly acute in boom-to-bust markets such as Las Vegas. The official homeownership rate stood at 58.6%, but after excluding borrowers with negative equity, the rate fell to just 14.7% in August 2009, according to the New York Fed study.

While the homeownership rate has fallen back to 1999 levels, homeowners' equity as a share of household real estate is lower by one third and is below 40% for the first time since World War II.

"It just kind of leaves you wondering what the safety net is for my generation, because it's obviously not our home," Mr. Doebler said.