When Alvarez took over, his vision was clear: build a defense, control the ball via the run, build the wall around the state by securing front-seven & lineman types, and get the "arms & legs" (skill position players) largely from outside. The QBs they've brought in have in many cases been competent or slightly better. After the obvious choice of Russell Wilson, guys like Tolzien, Stocco, and yes even Bollinger & Jim Sorgi have had their moments in big games. Hell, Matt Schabert was instrumental in a comeback win vs OSU once. Still the lack of an "elite QB" recruit is a valid point. Schools get reputations. QB is largely a position of ego. I'm sure there were many who had no desire to come to UW & hand the ball off to Monte Ball or Ron Dayne or Melvin Gordon 40 times, as opposed to throwing it 55 times. It's easy for an opposing coach to negatively recruit something like that. To a lesser extent, the weather & not wanting to "play school" may enter into it.
Why they don't better develop the ones they have, well, in many cases I think they've done OK there. Right now, with Mertz, it's looking a little more dicey. Bobby Engram is supposedly the guy in charge of that, but he's new. Maybe they miss Jon Budmayr more than anyone knows?