Trillions in Mortgage Debt Is Likely Underwater.

Byline: Ted Cornwell

New York-Experts at Moody's Economy.com now believe that one in six homeowners owe more debt on their home than the house is currently worth.

Moreover, economists at the firm currently expect home prices to drop another 10% before the bloodletting is over, putting even more homeowners under water and stalling prospects for a near term recovery.

When will that occur? Economy.com predicts that prices will hit bottom next summer, but will not start to meaningfully rise until "the middle of 2010," consumer economist Scott Hoyt told MSN. One reason the housing problems are likely to persist so long is the prevalence of pay-option ARM loans, which allow negative amortization in the early years. When those loans convert to full payments, many borrowers will see staggering increases in their monthly payment. That will be a continuing drag on the housing recovery, Mr. Hoyt said.

Peak to trough, Economy.com anticipates that home prices will fall 30% from a peak in 2006. So far, Mr. Hoyt says, prices are down about 20%, citing Case-Shiller data.

There are an estimated 75 million homes in the U.S., and the average home value is just shy of $200,000 nationally. If 16% of homeowners are under water on their mortgage, that would put roughly $2.35 trillion in home loans at risk. Total mortgage debt in the U.S. is estimated at roughly $10 trillion, according to this newspaper's Quarterly Data Report.

But that estimate, made by MSN, is ...