foreclosure has the following advantages.

Assuming the bank does the rightthing and just auctions it off immediatly,

The property is reoccupied by a prudent person who can take care of it.
Housing becomes affordable for those who have been prudent savers.
Banks become more transparent. Eventually all the broke banks willbe gone and banks can begin to trust each other and trust that economy has bottomed.
  Liquidation of unsold homes removes the overhang of supply, thestage for a recovery with much more affordable housing.
People who have not refied and still have original mortgages have no recourse loans. They can walk away, rent for awhile, save a downpayment on the very nice home that they can rent for less than the present mortgage, and end up in as nice a house at a much lower monthly cost. If the have already refied, thats a shame, they have a noose for life unless recourse is removed by law.

For years people have said they wanted affordable housing. Now they want expensive housing. Many of us will benefit from more affordable housing.

If the houses are not foreclosed and promptly resold....

The underwater "owners" have no incentive to keep up the house that expect to lose.The house deteriorates.

On time mortgage payers have no incentive to keep current, exacerbating the mortgage bankers problem. Many fo the investors in mortgage pools were pension funds. Pensioners will suffer.

the hallmark of third world status isuncertainty in the performance ofcontracts. enforcing contracts is necessary for a functioning society. OOne of the few legitimate duties enumenrated for government is the enforcement of contracts. for the government to become an active agent in nullifying contracts puts the economy and the society at risk.