Mortgage debt is still the problem

Carmen Reinhart and Vincent Reinhart
Financial Times

It’s time to “end the charade,” said Carmen Reinhart and Vincent Reinhart. If the economy is ever to rise out of the mire, we’re going to have to acknowledge that “the problematic loans made as the real estate bubble inflated” will never be repaid. In practical terms, that means mortgage lenders and investors in mortgage securities will finally have to own up to substantial losses.

“Managers of financial institutions always put off such recognition if they can,” but their continued “policy of denial” is dragging down the entire economy, threatening a lengthy period of stagnation similar to Japan’s, which was also brought on by an unwillingness to reckon with financial losses. And “the longer it takes to recognize financial losses, the larger they ultimately become.” Facing up to reality will increase the federal deficit “through some combination of higher resolution costs and further capital injections” from the government. But until mortgage lenders and investors come clean about their debt, the financial hangover will linger.