Luigi Zingales of Chicago GSB put out a mortgage modification proposal about a month ago that got a bit of attention, but deserves more even if it has no political prayer. It is one of a genre — advocating across-the-board contract change in response to a macro shock — that has at least two other prominent exponents, Randall Kroszner and Joseph Stiglitz. I am noodling this literature for a U. Conn. symposium paper.
Zingales proposes legislation to allow homeowners to reduce the loan principal in line with the drop in home prices in their zip code from the time of purchase (as measured by Case-Shiller). Creditors would get an equity kicker TBD.