More Homes 'Underwater' in Struggling Economy

Oct. 14, 2008— -- In the brand new subdivisions in the Phoenix suburb of Ahwtukee, where red-tiled roofs sprung up like wildflowers among the cactus during the housing boom, Melanie Bruce found her dream home.

"I've been in here for almost two years," Bruce said. "The thing that struck me the most was the big, open floor plan."

The home has been everything Bruce, daughter Grace and husband Byron had ever wanted. But in just three weeks they'll have to leave. Melanie Bruce, who applied for the home loan herself, is "underwater" on her mortgage, meaning she owes more than her house is worth.

"You realized it's great. I loved it, but there'll be other homes ... you have to let go," said Bruce.

"This is unprecedented," said Mark Zandi, chief economist at Moody's Economy.com. "There's never been a time when so many home owners are underwater."

Nearly one in six homes -- roughly 12 million households -- are underwater or "upside down," and it is a growing problem.

"All indications are that prices are still falling, and if they fall anywhere close to what the consensus believes they will, we'll have 15, 16 million homeowners underwater by this time next year," said Zandi.

"[Making] the decision initially is the hardest part when you have to admit that you failed," Bruce said. "You weren't able to make it with your house."

Two years ago, when Melanie Bruce bought her piece of the American dream, the market was booming. "The timing seemed sort of right because the real estate market seemed to be doing so well," she admits thinking.

It was booming so much that although Bruce was unemployed, she could still get a 100 percent mortgage on a $325,000 home.

"I didn't have a job," she said. "This is the crazy thing -- I didn't have a job. I was getting ready to go back to school. My husband wasn't even on the loan, so I was buying the house myself."

What she had was a year's worth of mortgage payments in the bank and got an 80/20 loan -- 80 percent at 8.25 percent interest, the rest at 13 percent interest.

"My mortgage guy, I told him point blank, I'd never bought a house on my own,'" Bruce recalled. "It seemed too good to be true to be able to buy a house, not have any money out of pocket and refinance in a year and have a payment that was half of your initial payment. I kept asking him point blank, 'Are you sure? Be honest with me. I'm really looking to you for guidance.' Basically I was told, 'You're fine.'"