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According to the most recent data, as many as one in 10 mortgages in the U.S. are delinquent or in foreclosure. The continued decline in housing prices has been exacerbated by the decline in the economy. The housing sector is caught in a continued downward spiral.

Foreclosure is a slow and costly process and represents significant dead weight loss for the economy. Estimates are that the cost of foreclosure is 30% to 35% of the value of a house. Moreover, there are externalities that are associated with properties that do foreclose in that they contaminate the value of neighboring properties. This issue is also critical because reducing losses to default and foreclosure will help stabilize the financial system by reducing the actual losses--and the uncertainty about them--that are passed through the financial system to the holders of the mortgages and mortgage-backed securities. Default losses are concentrated in the "first loss" and mezzanine tranches of collateralized debt obligations, which has made them highly toxic to the financial institutions holding them.

Here is the question: Given the attention that has been devoted to the problem of troubled mortgages and the number of programs that have been put forward to address them, why so little impact? The simple answer is that the programs are badly designed.

Some examples: Hope for Homeowners is a Federal Housing Administration program designed to modify existing loans by writing down the principal, offering insurance against further default and introducing shared appreciation on the property. Fannie Mae and Freddie Mac laid out plans for restructuring mortgages that lower payments but extend the term on the loan or involve balloon payments. The Federal Deposit Insurance Corporation (FDIC) has proposed to restructure troubled mortgages by lowering payments, but with no write-down of principal and with a balloon payment due at the end. So far, the response to these programs has been minor. Why?

First, they start with lousy incentives. Both Hope for Homeowners and the FDIC programs are available to homeowners who are delinquent by several months in their payments. If you want to restructure your mortgage, what does this tell you? Stop making payments! Sensibly, most bank restructuring programs require borrowers to show good faith by keeping payments current before they will consider restructuring.

Another problem is that restructuring per se is not a great solution. For the most part, it simply kicks the can down the road. Lowering current payments but requiring either a balloon payment or an extended payback term postpones the problem without solving it. Moreover, since it does nothing to address the negative equity of the homeowner, it increases the probability of secondary default if prices or owners' incomes continue to fall. For all of these reasons, owners become essentially like renters, with all of the adverse incentives that may imply.

The existing approaches to loan modification do not balance the incentives of the borrowers and the lenders. Shared-appreciation mortgages (which are a component of the FHA plan) do this well. Shared-appreciation restructurings offer a debt for equity swap whereby, in return for modifying the loan, the borrower must give up some of the future appreciation in the value of the property. Designed properly, this would discourage borrowers from seeking modifications if they can continue to pay their mortgage.

Wall Street extended its gains into a fourth session Wednesday, rising moderately after President-elect Obama soothed investors by pledging he would have a plan to deal with the nation's economic crisis on his first day in office.

Stocks that had fallen in early trading on reports of more economic weakness turned higher after Obama stated, "Help is on the way." He spoke as he filled more spots on his economic team.

There was still caution in the market, however, not surprising since Wall Street is coming off three sessions of gains that gave the Dow Jones industrials and the Standard & Poor's 500 index their first triple-session advances in more than two months. Traders were also cautious ahead of what is essentially an extended Thanksgiving holiday weekend; the market is closed Thursday and will have an abbreviated session Friday.

Obama's remarks were calming after the day's economic reports. The Labor Department said initial requests for unemployment benefits fell to a seasonally adjusted 529,000 from the previous week's upwardly revised figure of 543,000. That is lower than analysts' expectations of 537,000. Still, the initial claims remain at recessionary levels.

Meanwhile, the Commerce Department said orders to U.S. factories for big-ticket manufactured goods plunged in October by the largest amount in two years as the economy weakened. The 6.2 percent drop was more than double the 3 percent decline economists expected.

It also reported that sales of new homes fell 5.3 percent in October to the lowest level in nearly 18 years. The seasonally adjusted annual sales pace of 433,000 homes was the lowest level since January 1991, when the country was facing another steep housing downturn.

Americans also cut back on their spending in October by the largest amount since the 2001 terror attacks. The Commerce Department said consumer spending plunged by 1 percent last month, worse than the 0.9 percent decline that had been expected. The report also said personal incomes rose 0.3 percent last month, more than the 0.1 percent gain analysts had predicted.

Analysts said some of the turnaround was also due to the fact that the economic news was expected to be bad.

"What the market might be saying is that investors had been bracing for some of this," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research in Cincinnati, noting that investors have tempered how much spending they expect from consumers. "Expectations have come down, but the big question is if that's rational or not. Certainly the stock market and the credit markets have suggested there might be some rationale in that, but time will tell."

In late morning trading, the Dow industrials rose 35.60, or 0.42 percent, 8,515.07.

Broader indicators also rose. The S&P 500 advanced 3.46, or 0.40 percent, to 860.85, while the Nasdaq rose 30.10, or 2.05 percent, to 1,494.83.

The Russell 2000 index of smaller companies rose 5.30, or 1.20 percent, to 448.48.

Advancing issues outnumbered decliners by 9 to 5 on the New York Stock Exchange, where volume came to 333.1 million shares.

On Tuesday, stocks finished mostly higher as investors were encouraged by new government initiatives to help unfreeze the credit markets. The Treasury Department and the Federal Reserve said they planned to provide $800 billion to aid the market for consumer debt and to make mortgage loans cheaper and more available.

The Dow finished up 36 points, for a gain of more than 900 points across three sessions. The Dow last put a three-day advance together on Aug. 26-28. The S&P 500, meanwhile, had its first three-day rise since Sept. 10-12. Tech stocks lagged and sent the Nasdaq moderately lower as investors feared businesses will further cut back on technology spending.

Still, the market's performance in recent sessions has been a welcome show of stability as stocks have generally traded with less volatility than they had in the past three months as the market's yearlong pullback intensified.

Salamone remains cautious and isn't sure the calm will last.

"I don't think its a sign of longer-term stability, but feel this is a sign of shorter-term stability. There's just too much uncertainty out there," he said.

Bond prices were mixed Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.00 percent from 3.10 percent late Tuesday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.05 percent from 0.09 percent late Tuesday.

The dollar mostly rose against other major currencies, while gold prices fell.

Light, sweet crude rose $1.12 to $51.89 a barrel on the New York Mercantile Exchange.

Some of Wednesday's caution was also likely due to uneasiness ahead of the holiday shopping season. The season, which accounts for as much as 40 percent of annual profits for many stores, is expected to be the weakest in decades, as consumers grapple with rising unemployment and a drop in household wealth.

Some consumer technology names managed to post gains as investors hoped they might be able to see post holiday results.

Apple Inc. rose $3.49, or 3.8 percent, to $94.29, while Dell Inc. rose 49 cents, or 4.7 percent, to $10.91. Sprint rose 22 cents, or 9.4 percent, to $2.55.

Blue chip stocks were mixed. Consumer products maker Procter & Gamble Co. fell 70 cents to $62.48, while Chevron Corp. rose $1.06 to $77.59.

Overseas, Japan's Nikkei stock average fell 1.33 percent. In afternoon trading, Britain's FTSE 100 fell 2.10 percent, Germany's DAX index fell 1.37 percent, and France's CAC-40 fell 2.03 percent.