By now, Sheila Bair must be used to feeling like a Cassandra.

Sheila Bair, former chairman of the Federal Deposit Insurance Corp. (Andrew Harrer/BLOOMBERG)

“Trying to do this on the cheap just didn’t work,” Bair says, referring to the administration’s mass refinancing program through Fannie Mae and Freddie Mac-backed loans. “They were relying on a voluntary program with weak economic incentives and the big servicers were not putting the resources that were needed into these big servicing operations.”

Bair still believes the only way for the housing recovery to happen would be “to restructure the mortgage to get the borrower paying again, or you have to repossess the property and put it back onto the market.” This could not only expanding refinancing to more homeowners, but also principal write-downs, which Bair supported as early as 2008--and a growing number of liberal Democrats and housing advocates are pushing the administration to adopt.

Edward DeMarco, the head of the housing agency overseeing Fannie and Freddie, has been a skeptic of principal reduction, arguing that the likely cost and risk to taxpayers aren’t worth the potential upside to underwater homeowners. But pressure for write-downs could grow as mortgage rates have been creeping up and refinancing has slowed. The administration may also be pressed to ramp up its pilot program to turn foreclosed homes into rentals, particularly as the foreclosure rate is expected to jump this year.

Bair doesn’t deny that principal reductions, or her own proposal to insure mortgage modifications against future default, could be costly. But, she concludes, “if you want to get this market working again you need to do some things that in the short run may cost banks, investors, and the government some money but in the longer term will right the housing market.”