Martin Feldstein has a good conversation starter in the New York Times today.  While the need to create jobs remains the biggest economic hurdle for policy-makers, the housing crisis is still with us.  Consumer spending requires jobs, and strong wage growth, first, of course.  But consumer wealth has been tied to housing for a long time in our economy.  Housing values will struggle to climb again as long as so many houses remain in foreclosure and/or valued below what people owe on them.  To get housing values back up, first we need to stop the bleeding.  And Feldstein proposes the following:

To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are “underwater” are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Here’s how such a policy might work:

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddie Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home. This would all be voluntary.

This plan is fair because both borrowers and creditors would make sacrifices. The bank would accept the cost of the principal write-down because the resulting loan — with its lower loan-to-value ratio and its full recourse feature — would be much less likely to result in default. The borrowers would accept full recourse to get the mortgage reduction.

Read How to Stop the Drop in Home Values here.