As the financial crisis hits Main Street America, nearly one in six US homeowners are finding themselves in the same position, threatening the US economy with a new wave of foreclosures and bankruptcies.

About 12-million US homeowners owe more than their homes are worth, compared with 6,6-million at the end of last year and slightly more than three 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." Already, US 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.

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 US credit crunch last year.

With current home prices likely to decline on average by another 10%, Zandi said there will be 14,6-million homeowners underwater by September next year.

"House prices have collapsed and you've got many homeowners who bought homes in the last three years who put very little down or have been borrowing against their homes," said Zandi. "That's causing this to rise very rapidly."

Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the US taxpayer than the $700-billion the US government has pledged to recapitalise 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."

While the US government has focused its rescue on banks, it has done little to help individuals who are struggling to pay their mortgages, apart from the Hope Now programme, which has facilitated a few hundred thousand mortgage restructurings.

The government may have no option but to step in, especially if a rising tide of foreclosures and fall-off in property and other tax revenues endanger municipalities and local governments and force some into bankruptcy.

Both presidential candidates have outlined plans for relief for distressed homeowners but critics say they have been short on details and there appears to be little consensus about how best to help homeowners who are underwater.

*The Above is only a portion of the Article by Tom Brown from Reuters, Click here for a Link to Complete Rueters Article

Below is a solution that makes more sense then anything I've seen....it's called the "The Trickle-Up Plan"

which advocates "Foreclosure Vouchers?"

by Mark Thoma of the RGE

The Plan works as follows:

Give people a tax cut or rebate as in a standard fiscal stimulus package, the government would distribute to taxpayers mortgage foreclosure vouchers. These vouchers can be used either by homeowners to pay mortgages on homes in severe danger of foreclosure, or to help homebuyers to purchase foreclosed homes.

As with other stimulus packages, these vouchers would be distributed to taxpayers based on their incomes with those with the lowest incomes receiving the largest vouchers and those with incomes of, say, over $200,000 receiving nothing at all. ... The vouchers, however, could only be fully used by homeowners facing foreclosure or interested in buying a house in foreclosure.

For the majority of taxpayers who cannot use them, the vouchers could be sold on a secondary market... These vouchers would likely sell at a discount, perhaps of about 25%. Since the plan will increase demand for foreclosed housing, it will stop the fall of housing prices, thereby helping to end the housing crises and starting the economy on the road to recovery. ...Instead of a rescue scheme that relies on the benefits trickling down from Wall Street to Main Street, the benefits of this plan will trickle up from Main Street to Wall Street.

The Trickle-Up Plan would ... help keep people in their homes and create demand for housing currently in foreclosure. By doing so, it will help stop the fall in housing prices, and also increase the value of the lowest elements of the mortgage backed securities — precisely what governments wants to do.