"Under water" mortgages are growing threat to U.S.

By Tom Brown

CAPE CORAL, Florida (Reuters) - Long before she filed for bankruptcy, Ann Neukomm was "under water" -- she owed more on her mortgage than her house was worth -- a situation more and more Americans are finding themselves in.

As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, 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.

"At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."

If, like Neukomm, 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.

Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.

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.

Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.

She ended up filing for bankruptcy in May after failing to keep up with mortgage payments on her home in Cape Coral, a once-booming town in southwest Florida.

"It's a dirty word," said Neukomm of her bankruptcy and personal feelings of failure. "Nobody wants to say it."

WASTELAND

Cape Coral, built over swampland near Fort Myers on Florida's palm-fringed Gulf Coast, was fertile ground for the real estate boom, which peaked across much of the United States three years ago.

It is now a wasteland, with barren strip malls, a bloated inventory of unsold or abandoned homes and ubiquitous for-sale signs that speak volumes about the plunge in housing prices and surge in mortgage defaults that triggered the U.S. credit crunch last year.

With current home prices likely to decline on average by another 10 percent, Zandi said there will be 14.6 million homeowners under water by September next year.