"At the top of the bubble,... we created a whole lot of debt relative to the value of houses that seemed to be there," says Alex Pollock, a finance expert at the conservative American Enterprise Institute in Washington.
Then home values fell, but much of the debt load remains on household balance sheets.
The solution involves some sort of adjustment, Mr. Pollock says, whether through default or some conversion of the debt into a new, affordable structure.
Here's a closer look at some of the main options for housing policy: an all-out approach to loan refinancing, intermediate refinancing efforts, and the status quo.
1. Create an all-out refinancing effort.
One approach, advocated by economists Glenn Hubbard and Chris Mayer, would be to offer a simple refinance for most US borrowers at today's ultralow mortgage rate (just over 4 percent). Currently, that's not available to "underwater" borrowers, whose home values have fallen lower than their loan balance (also known as negative equity). Under this approach, the low fixed rate would be available to anyone with a loan backed by Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA).