Since the early days of this recession, Harvard economist Martin Feldstein has been arguing for audacious action to repair the housing market. He warned that a growing overhang of foreclosed properties would suppress the recovery, and how right he was. It's a difficult problem but the failure to confront it effectively has been the biggest missing piece in the policy response of the administration and the Fed. Feldstein is still banging on about it (How to Stop the Drop in Home Values):
[F]or political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don't want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don't want to provide any more help to the banks that made loans that have gone sour.
But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.
The article suggests a plan to write down mortgage principal that could cost up to $350 billion. I did say "audacious".