How to end the housing mess

For starters, we could use a true refinancing program that reduces principal and interest owed, so that homeowners who took out mortgages in good faith could afford to keep their homes.

Adam Levitin of the Georgetown Law School has proposed to amend the bankruptcy code to allow a distressed homeowner to go before a judge and have the mortgage reduced to current value of the house. Howell Jackson of Harvard Law School wants government to use its power of eminent domain to turn securitized loans back into whole mortgages. The reduced market value of the security would translate into a subsidy for the new mortgage.

Either approach would enable millions of distressed homeowners to keep their homes, and thus arrest the decline in real estate values.

The Recovery Act of February 2009 includes funding to help municipalities and community organizations acquire and repair vacant houses. This arrests neighborhood blight and increases the supply of affordable homes. But that money is running out, and no new funds are likely, given the austerity mood of both parties.

Congress is being shortsighted. The choice is aggressive action — or a slow bleed that will sap the economy’s strength for a generation. While both parties fixate on deficits, the deeper sources of the economic crisis are offstage, demanding attention.