That's the problem with this foreclosure mess. There's no good solution.
Do you let the formers owners live in these homes without paying their mortgage? As you said, this rewards irresponsible behavior. So what to do? Leave the houses vacant? We're seeing what happens with this course of action. Tear 'em down? That's a possibility. Turn them into Section 8, low-income housing? Some municipalities are doing just this, much to the dismay of the neighbors.
This is just a big, ugly mess.
you let the free market sort out this mess.
This is the best option. Better than letting the property stay vacant.