Banks and homeowners alike need to take a more realistic view about how to stem the tide of foreclosures overtaking the housing market and the economy, the head of a government watchdog panel told CNBC.
The more than $700 billion the government allocated toward dealing with foreclosures has only made a minor dent in the problem, said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program.
That's because those on both sides of the equation are not taking a proactive enough approach, she said.
"We have to sober up on this and say, 'Look, it's time to get realistic,'" Warren said. "It's time for the banks to get realistic about the value of the second mortgages, it's time to be realistic about doing some principal writedowns."
But the onus is not entirely on banks. Homeowners with distressed mortgages also may need a reality check.
"Some of you should stay in your homes...and some of you don't belong in those homes and you've got to be moved out," Warren said. "And frankly, those houses need to get back onto the market and get into the hands of people who can afford them."
"In other words, acknowledge the problem, deal with it, write off the losses and start rebuilding an economy on solid ground."