IMF: Principal Reductions Now!

The International Monetary Fund has explicitly called for principal reductions for underwater borrowers to deleverage individual balance sheets and jumpstart a soft recovery. An endorsement of principal reductions at such an establishment level could remove some of the stigma, and force a deeper reckoning over the need for them. And the IMF goes further, stating that the US should consider cram-down, the ability for judges to discharge and rewrite the terms of mortgage debt in bankruptcy.

The IMF cited three major impediments to US growth over the next two years: household deleveraging, fiscal restraint and subpar global demand. All three go hand in hand; fiscal restraint will reduce demand, and so will deleveraging, which reduces consumption. The US cannot do much about slow global demand and growth, but we can impact our own fiscal situation here. And the IMF believes that one of the few upside risks in the economy is in the housing market:

A more positive outlook for the housing market can also be envisaged, with a faster-than-expected recovery in housing starts associated with pent-up demand. The recovery could also strengthen if the policy measures aimed at a faster resolution of the housing crisis gain traction.

Emphasis mine. What are those resolutions? Topping the list for the IMF are principal reductions:

Rest here…