This will be a quick note. I will probably post more extensively tomorrow.
The Housing Crisis Fairy ain't coming. Ten years of housing were built in the 5 years of 2001-2005, and the only way the market will be restored to a reasonable equilibrium is by falling house prices. Those who bought houses in 2004-7 at very least are going to have to acknowledge that the value of their house is declining. I.e., there will be pain.
Fed Chairman Ben Bernanke has signed on to the idea of voluntary mortgage cramdowns, similar to those proposed by the Office of Thrift Supervision last week. Here's a quick summary, per CNN:

One proposal he endorsed, floated last month by the Office of Thrift Supervision, is that bankers be willing to reduce the principal that troubled borrowers owe on the loans, rather than simply freezing or reducing interest rates. The lender would receive a warrant for the amount that the mortgage's loan balance is reduced, with the understanding it would only be paid with the proceeds of a sale at a higher price than the current depressed value.

Bernanke said with the falling home values and many homeowners owing more on their homes than the home is worth today, there's limited incentive for a homeowner to try to stay in a home without that kind of relief.

In the full speech, Bernanke acknowledges that the multi-layered, multi-ownership nature of CDOs (where more than one party "owns" part of a mortgage) will make this difficult.

This is nevertheless an important speech. Bernanke is admitting that cramdowns will be necessary (per my blog entry last week). The only bridge left to cross is that it will take the authority of the bankruptcy court to make it work (In that regard, the GOP successfully "filibustered" such a change in the bankruptcy law last week).