If the Dow Jones Industral Average is hitting records highs, how come the economy where most Americans live still sucks?

The answer is not just that many people don't own stocks or that cash-rich businesses aren’t hiring, or other oft-cited trends such as stagnant wages or stubborn jobless rates. It’s because a giant slice of the housing market is still frozen, due to millions of underwater mortgages, and that is smothering local economies.

“Each house that is sold creates a number of jobs,” said YouWalkAway.com founder Jon D. Maddux, whose company advises people facing foreclosure. “There is a huge drain on the economy because of this.”

How serious is this economic undercurrent? It depends who you ask, but some affordable housing experts say that it is so big—with 27.5 percent of U.S. mortgage holders owing more than their house was worth as of December—that it helped push the U.S. mobility rate to its lowest level since the Census Bureau started tracking it decades ago. In other words, even though 792,000 people moved last year because lenders foreclosed or were evicted, 13.8 million were stranded with underwater mortgages as of December.

“The underwater homeowners is a serious drag on the economy,” said Brent White, a law professor at University of Arizona and author of Underwater Home: What Should You Do If You Own More On Your Home Than It’s Worth. “When there was a housing boom, there was a lot of spending because homeowners had a lot of positive equity. They were spending because they felt wealthy… now they feel poor. They think their house is not a good investment anymore. There is a negative wealth effect because they feel poor.”

With so many households and communities still held hostage by debt, it is no wonder that news reports of Wall Street's recovery land with a thud on Main Streets across America (see map) where the real estate collapse is still raw. And the prospects for solving this nationwide economic crisis are very slim, because neither the private sector nor government has anything underway that’s intended to help most of these 13.8 million underwater households.

“They’re not offering that,” White said. “That’s the problem. It’s not there.”

Beyond Foreclosures: The Rest Of The Iceberg

The housing bubble was at the heart of the meltdown that caused the Great Recession. People bought homes with easy access to capital. Or they borrowed against rising home values to finance their lifestyles. When those loans could no longer be paid, the market crashed. But the debts did not go away. The most visible part of that collapse was the foreclosure crisis. Today, private investors are buying thousands of foreclosed homes, causing low-end home prices to rise. But they haven’t risen enough to fix underwater mortgages—where the money owed is more than current selling prices.

“The housing market is bifurcated,” said Paul Staley, who buys and sells low-end homes for a Bay Area affordable housing non-profit. “On one hand, what’s happening is prices are strong, but there’s a huge portion of supply where people are not free to trade because they’re still underwater. They’re trying for a loan modification. They want to move, but can’t. Not yet. How do you work that out? This is thousands of local households.”

“There is an artificiality in the housing market now,” he explained, saying that prices are rising in part because a significant supply of affordable homes—those with underwater mortgages—are not available for sale. “Banks slowed down the foreclosure process. But all these other homes are in limbo. The next big question is how do you resolve the debt issues hanging over these homes?”

That question does not have quick answers. Lenders do not want to take losses, so they’re waiting for prices to rise. While there’s cheery business press coverage touting the marketplace for liberating a lucky few, the larger reality is that millions of people are stuck in homes they paid too much for—or borrowed too much against—and are hesitant to spend, slowing local economies. In 2012, Zillow Real Estate Research said 2 million borrowers recovered from underwater positions, but 13.8 million borrowers remain there. And those individuals are not spending money for much besides bills and other necessities.

“I think of the fear that people have,” Maddux said, when asked about underwater loans and the falling mobility rate. “They are afraid to sell their homes because they cannot buy another one. That is a very strong drain on the mobility rate… You do have this very real problem with inventory and problem with people unable to sell their homes.”

“If you have an underwater home and you are unemployed and you get a job offer across the country, you can’t take it,” said White. “If you’re underemployed and you get an offer across your state, you can’t take it. That’s not good for the economy. You want people to go where their talents can be used effectively.”

“The people who are least able to afford these kinds of things are locked in homes that are distant—far from where they work,” said MobilityLab.org’s Tom Fairchild, whose organization encourages people to bike and walk to work, not commute in cars. “They’re locked in this formula of drive until you can qualify… They underestimate the costs. We see this all over the country.”

Neither the private sector nor the government is offering much help either, these experts said. Financial industry lobbyists were successful in persuading Congress not to require them to accept losses on underwater loans—and offer borrowers a new terms at a lower rate, White said. Many of today’s underwater loans were written a few years ago when interest rates were nearly double what they are today. Because those homes are now worth less than their mortgages, they’re stuck: no lender will work with them to refinance negative equity, because a lender looks to the home’s value as its way to secure potential losses.

Moreover, most of the government programs, such as the recent multibillion-dollar settlement with the state attorneys general, is designed for people who are facing the loss of their home—foreclosure and eviction—which is not the same as having an underwater mortgage. The underwater borrowers are mostly still paying, quite profitably for the lenders. In some cases, banks accept what's known as short sales, where a new buyer pays less than the loan. But that is a lengthy process and not widespread.

“There has been some refinancing,” White said, but not enough. “If you really wanted to solve the problem, you might require banks to refinance, or have direct lending from the government—refinancing at today’s interest rates… Japan had a direct government refi program when its home prices crashed in the 1990s.”

When asked if he saw anything on the horizon that might break the underwater mortgage logjam, White said no, there was no public or private sector initiative of that scale.

Sympathy For Banks, Not Borrowers

Some of the reason is government policymakers and lenders are not very sympathetic to people who are seen as borrowing and spending beyond their means. That stance, when examined, is hypocritical, White said.

Businesses, including lenders, are encouraged to write off bad debt and are rewarded with higher market valuations, while individuals who write off bad debt are penalized by lower credit scores and higher borrowing costs. “We expect people to keep paying, but we expect business to shed their toxic debt,” he said.

What this means is that regions of the country with the most underwater loans (see map) are poised to have a drag on local economic recovery into the foreseeable future. And it is not because of the oft-cited factors associated with America’s growing gap between the haves and have-nots, such as still-high unemployent, wage stagnation, globalization and reluctance in hiring trends.

It’s because lenders—and the government—are not willing to stop a massive transfer of wealth from 13.8 million still-underwater borrowers to banks by lowering their interest rates, and in so doing allowing each of those households to spend several hundred dollars a month elsewhere in their communities.