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Households likely to deleverage debt with underwater mortgage defaults: Report

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Bank of America Merrill Lynch analysts said the most likely way households will deleverage roughly $1 trillion in excess debt is through the default of more underwater mortgages. Home prices in the Standard & Poor's/Case-Shiller 20-city index have dropped 28.6% from the peak in the summer of 2006. This has led to more than 10.8 million homes, or 22.5% of the entire U.S. market in negative equity as of the third quarter, according to the analytics firm CoreLogic (CLGX). And while that percentage is down from the 50 basis points from the previous quarter, negative equity remains the primary factor holding back a recovery in the housing market and the overall recovery. Analysts said the collapse in home prices means the asset value supporting Americans' debt is no longer there. "It’s the holidays and talk of deleveraging needs would appear to be sacrilegious or even un-American," BofAML analysts said. "Most of the deleveraging will come through default of underwater mortgages, although less consumption likely will be part of the equation as well." But consumers are not alone. Excess debt is also an issue in municipalities and sovereign nations. Recent increases to interest rates will put more need for the U.S. to begin implement fiscal constraint. "At a minimum, the vast amounts of excess debt permeating the developed economies will act as a drag on growth for some time," analysts said. Write to Jon Prior.

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