Three years into the recovery, Americans are still struggling with underwater mortgages and economic growth remains slow and painful. This paper marshals the most recent and robust research to prove that there is a clear link between between economic stagnation and high levels of household debt, indicating the need for mortgage principal reductions.

Key Findings:

• Several years into this recession, the overall amount of underwater mortgage debt is still very high. Recent estimates show that a third of all houses with a mortgage owe more than the home is worth, and the total amount of underwater mortgage debt could come to $1.2 trillion.
• The most recent empirical evidence, from academic quarters to the IMF, shows that underwater mortgage debt is creating a drag on the economic recovery. The recovery is weaker in places where mortgage debt is the highest, as more mortgage debt results in lower consumption and higher unemployment.
• Other explanations of the relationship between the housing crash and the weak economy, such as structural unemployment created by the house bubble, contain serious weaknesses.
• Debt writedowns, foreclosure mitigation, and other housing sector specific policies are a crucial tools in dealing with this “balance-sheet recession” and getting the economy started again.
• Foreclosures exacerbate these problems by creating vicious cycles of destructive economic activity. Some estimate that foreclosures have caused an additional 25 percent of the decline in economic activity.
• The market is not likely to sort this out by itself. There are numerous conflicts within the system of servicers that manage mortgage debt that incentivize saddling consumers with greater burdens.

Read the paper: "How Mortgage Debt is Holding Back the Recovery."

Download a PowerPoint presentation on the paper.

Underwater home image via Shutterstock.com.