Similar to the proposals being floated in Iceland, reset all mortgages to 70% of current property values. This would likely have to be mandated by the government and the government would have to change the tax law so that people aren't taxed based on cancellation of debt for which they would have no real cash to pay the tax. This would get consumers spending again, eliminate the tremendous costs associated with foreclosures and increase homeownership.
Why would the banks go for this? First of all, they already have effectively written off this bad debt any way. The amount of money they are going to get from this loan through a foreclosure or short sale is actually going to be less after factoring in legal fees, etc. Lastly, the banks would see a huge increase in new loan and refinancing business.
Also, people would feel wealthier which has proven to spur consumer spending, the real engine of economic growth.
This proposals helps people, the economy and the banks.