Underwater mortgages threaten economy

Underwater mortgages are a growing danger to the U.S. economy:

As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves [underwater on their mortgages], threatening the U.S. economy with a new wave of foreclosures and bankruptcies.

About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com. ...

If ... these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks. ...

In a slowing economy, it doesn't take much to push an underwater mortgage into default.

"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said. ...

Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the U.S. government has pledged to recapitalize banks and buy up distressed debt from financial institutions.

"The government is going to have to start filling this negative equity hole and that's just going to be a direct cost to taxpayers," Zandi said. "This is going to be the really costly part, I think, for taxpayers." ...

Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity.