In a recent report, Mustafa Akcay, of Moody’s Economy.com masterfully outlined the delicate relation between underwater homeowners and the recovery of the US economy.

Moody’s expect about 4 million homeowners to enter foreclosure in 2010 with failed loan modifications further depressing home prices. This drives their call for additional housing rescue programs.

Here are their four reasons why underwater homeowners pose a risk to the US recovery:

1. Negative equity has become an important driver to foreclosures.

2. The number of underwater homeowners, though declining, is still critically high.

3. The Loss of home equity undermines consumer spending and depresses house prices.

4. The US economic expansion will remain fragile as long as the housing market remains vulnerable.

Moody’s Economy.com estimates:

• 14.9 million homeowners, one-third of all mortgage borrowers, owed more than the market value of their homes at the end of 2009.

• This is 1.2 million lower than the peak in Q2 2009.

• More than 9 million homeowners’ loan-to-value was above 120% by the end of last year.

• Mortgage outstanding in negative equity at the end of 2009 totaled $2.5 trillion nationwide.

• More than of mortgages outstanding might be at risk of defaulting.

• Total amount of negative equity was $900 billion at the end of last year.

• States with once-hot housing markets have the largest volume of negative equity.

• Underwater homeowners owe $254 billion in negative equity in California and $88 billion in Florida.

• In Nevada, 80% of mortgage loans were under water at the end of 2009, with Arizona and California following close behind.

• By the end of 2009 1.6 million homeowners in California had loan-to-value ratios above 120%, followed by Florida with 1.1 million and Michigan with 560,000.

• Michigan is the only hard hit state that did not experience a housing bubble, job losses brought values down.

Mustafa Akcay summarizes, “Home prices will remain depressed at least until 2012, with some tentative decline in the second half of 2010 and in 2011, keeping the number of negative equity homeowners high for some time.”

“The downside risk for strategic defaults is that lenders more aggressively seek repayment. In that case, underwater borrowers who are able to service their mortgage debt would be discouraged from defaulting, and strategic defaults would constitute a smaller share of all foreclosures.”