Robert Shiller, one of the most respected housing economists, thinks we need a new approach to cure housing's ailments.

Robert J. Shiller is more than just a highly-respected professor of economist at Yale – he’s the co-creator of the Case-Shiller Home Price Indices, one of the most influential readings available on the U.S. housing market.

Therefore, it makes sense that when Shiller speaks, people listen, and a recent op-ed in the New York Times on how to fix the housing market is no exception.

Housing’s ills, Shiller writes, can be centered on one crucial problem – the only way out of the downturn is for lenders to write down the amounts owed by homeowners (the principal reduction strategy that has garnered so much attention the last few months), but all the stakeholders who have a share in the mortgage market cannot seem to agree on how to go about doing that.

It’s not their fault, necessarily. Mortgage financing, Shiller explained, includes owners of not just first and second mortgages, but of home equity lines of credit, mortgage-backed securities and collateralized debt obligations – a worldwide web of financing that makes any kind of compromise impossible.

So how, then, do we set up a system of principal reduction, if it does, as Shiller argues, have such a positive effect on housing? He mentions a couple ideas:

1. Pass legislation that empowers community-based, government-appointed trustees to impose write-downs that benefit that financing group on a whole, rather than asking each one if they’d be better off.
2. Direct the government to use its eminent domain power, which allows it to seize property with fair compensation to the owners, as long as the seizure benefits the public good. Though eminent domain normally works with land and housing, Shiller thinks it could work equally well with mortgages, except now, the government would seize the mortgage, fairly compensate the financiers and issue new mortgages with smaller balances to the homeowners. Those new mortgages would be backed by new investors, and because the homeowners would be able to afford them, the investors would profit on the deal.

San Bernardino County in California, is currently working with Mortgage Resolution Partners on such a plan (according to RealtyTrac, the city of Riverside, which is in San Bernardino, has the highest rate of foreclosure in the country), but ultimately, Shiller writes, collective action is what is needed to fix housing.

“We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices,” he wrote. “We need to summon our resources to exercise the authority that allows collective action.”