How to renegotiate all those bad loans at no cost to the taxpayer.

Now here's the bonus: This plan is very low-cost. It could be introduced as a prepackaged bankruptcy, requiring just a judicial stamp of approval. Congress is considering some similar plans that allow homeowners who enter Chapter 13 bankruptcy to reduce their mortgages to the market value of the house. But Chapter 13 cases are slow and expensive, and the country's few hundred bankruptcy judges cannot handle millions of these full-blown proceedings. Our plan, by contrast, is quick and dirty: It strips away the irrelevant elements of Chapter 13 as well as relying on ZIP code-level housing price indexes to deal with appraisals. And whereas a Chapter 13 proceeding can be used to dispose of credit-card debt and other unsecured debt—which could throw these credit markets into turmoil—our plan is limited to mortgages. Borrowers with adjusted mortgages have a better ability to pay off their other debts.

With 62 percent of Americans asking for some kind of homeowner relief, government intervention is inevitable, as the Obama administration has recognized. Although many people think that one can help homeowners only by hurting creditors and hence driving up the long term cost of credit, our plan will help homeowners and reduce the long-term cost of mortgages. It does so by reducing an inefficiency in the mortgage market whose magnitude had been overlooked until the current financial crisis. And unlike other proposals, it would not cost the taxpayer a cent.