Agreed, but there is a lot of debate on this for the following reasons. The banks own so many homes, that there is an argument that they could flood the housing market with under priced homes which would slow the housing recovering by driving down the prices of all homes. Additionally, there is a lot of speculation that part of the $1.2 trillion stimulus packages went directly to the banks to account for the above argument and actually requires the banks to slowly release their inventory of homes in order to prevent flooding the housing market with under priced homes (again because that would continue to drive down value across the board).

All that said, as mentioned above I do agree with you, because assuming banks are keeping homes off the market this only artificially keeps home prices stable, and many of those REOs are failing into disrepair. In my opinion it is better to have ownership and people in homes, even at a short term cost of flooding the market with under valued homes. After all it is the banks who originally to the risk on these loans they foreclosed on and they lost.