Negative Equity Problem Could Make Foreclosure Crisis Even Worse

Negative equity has the potential to make the foreclosure crisis much, much worse.

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Just when you thought the housing market might be on the mend, news that foreclosure activity is on the rise across the country reopens a painful wound.

Almost 60 percent of the nation's largest metropolitan areas saw increased foreclosure activity in the first half of 2012, according to a recent report from foreclosure information website RealtyTrac, with troubled states California and Florida cropping up again as major sources of the country's foreclosure woes.

As if that weren't bad enough, things could get a lot worse thanks to the gigantic negative equity problem, which has pushed many homeowners to the brink of foreclosure and put immense pressure on household finances.

Loans currently in the foreclosure process amount to about $45 billion in negative equity, according to RealtyTrac CEO Brandon Moore. But that figure balloons to $1.2 trillion when you add in the more than 12 million underwater mortgages that haven't started the foreclosure process—26 times the negative equity currently associated with troubled loans.

"40 million Americans choose to pay a mortgage every month and even if just a small fraction of those choose not to do so, things can compound and get much worse pretty quickly," Moore says.

For the time being, the vast majority of those 12 million or so Americans with underwater mortgages continue to make their monthly payments, but the longer the housing market and economy stay stuck in the mud, the more likely it is they could run into trouble.

But the government's intervention into the foreclosure process might actually be doing more harm than good, according to Moore. Though improper foreclosure practices have been scrutinized and now more heavily regulated, those actions do little to address the potential the negative equity problem poses to unleash a new, perhaps more devastating flood of foreclosures.

Moore concedes that the National Mortgage Settlement reached earlier this year that requires $17 billion in mortgage principal reductions is a step in the right direction, but the amount pales in comparison to the magnitude of the negative equity situation.

"This is an issue that's going to get bigger before it gets smaller," Moore told CNBC in a recent interview. "My concern is that I don't hear anybody else talking about it and I'm seeing the problem go unaddressed by the big banks [and] by the presidential candidates."

Meg Handley is a business reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter.