Yeah, that bugged me too. I think the official word was that Kanji wasn't necessarily homosexual, but might have been (and wasn't sure.) The steamy bathhouse dungeon is meant to represent inner fears, not truth if you recall.
And I agree that it was the best video-game depiction of the confusion of teenagers questioning their homosexuality in today's society (even though it's located in Japan, no U.S.A. games do better.)
Fable's depiction struck more as leaving out sexual discrimination code than anything else. It's not Harvest Moon or Mass Effect or Baldur's Gate 2, where romancing is actually affected by the other person's personality. The Sims 2 support is a bit more significant (though not by much) but it still doesn't go to depths that more dialog-focused games do with heterosexual romance.
A dialog-heavy homosexual male-on-male relationship depicted ingame will come with time. The fear of homosexuality is hardly restricted to games; we'll see more and more pushing the envelope with time and it'll become more accepted. That's pretty much the way of any social change in society relating to a minority or feminism.
It's not just gamers that have problems with homophobia, I think some of the people that make ratings for games are the same people who would put "Gay sexual content" on a game rather than "sexual content" and they'd probably make a whole other rating for it too.
I think you have nailed it on the head here. It's rather like hearing that the Avatar: The Last Airbender doing its casting call for "caucasian or any other ethnicity" instead of "open to all people". But it isn't whether or not someone is gay in a game, it is how it is handled. Gay people are JUST PEOPLE. Stereotypes aside, most of their day is filled with work, school, errands, deciding what to eat, etc.
I want to see gay people represented in games because they exist in reality. But I want them to be people not caricatures. I like how Jade Empire and Fable I and II handled the issue. The main character's sexuality wasn't pre-set. It was whatever you chose to pursue. Likewise, just like real life, some people would like you and some people wouldn't based on their OWN sexuality.
Something I haven't generally seen are children who are SMART in video games. (Okay, and not evil.) Children can be quite industrious and clever, yet games usually portray them as helpless lumps. I don't expect rocket scientists, but I DO expect them to be able to throw rocks and run from an enemy. Perhaps, just better writing and fewer stereotypes in general would be good in the gaming world. Reflections of reality allow us to slip into the state of disbelief easier. (As would more variety in voice actors on some of these games.) :)
I'm still waiting for the day when a mediocre, derivative, totally mainstream and completely overhyped game gets released that features the big, burly Space Marine running off to fight aliens so his husband and children can live in the Earth Colonies of Saturn without being processed as alien foodstuffs.
If in all the media blitz surrounding the game, all the "EXCLUSIVE FIRST LOOK!" articles in magazines, all the "Hands-On Preview" articles on Kotaku and Destructoid and all the other video game websites, if throughout that entire maelstrom of coverage, the Space Marine's sexual orientation isn't mentioned at all (except maybe as a passing reference to his husband, the same way any article might refer to a game character's love interest)... That's how you'll know it's not a big deal anymore.
Probably isn't gonna happen for another few decades, but a guy can dream.
Not terribly long ago (in a cosmic sense) I wrote a post about an issue somewhat similar to this, where a talented Modder was being harassed for posting nude male models and clothing that displays male genitalia for the games Morrowind and Oblivion (for which there are literally tens of thousands of different nude female models and clothing showing off breasts and vaginas). The kicker in my tale, though, was that the Modder is female herself and yet was derided for creating "gay" Mods, as though only those works which cater to heterosexual males should be allowed.
As others have said both here and in my thread, as well as in my own experience, those who complain the loudest about this sort of thing are usually the most insecure about their own sexuality or place in society, and therefore feel the need to object the loudest when anything that might force them to react comes along. "Methinks the gentleman doth protest too much" really comes into play here.
However, another aspect that seriously bothers me is those responses from otherwise well-meaning heterosexuals that basically equate to "Well, I'm okay with how this is set up, so why does it bother you so much?". It's a distinct and disturbing lack of empathy for others who are already struggling to gain acceptance for a way of life that, in its basest aspects, HARMS NO ONE. Seriously, fellow straight guys, let's "man up" and put out a hand to give our gay friends and neighbors some help. If you're as secure in your sexuality as you should be, then Chet in Accounting being gay shouldn't matter any more than him being a Red Sox fan or a collector of prog rock albums. Real men don't let some idiot's biases keep them from doing what they know is right. Right?
On a side note- some in this thread should ask "why should the protagonist be gay?" To that, I respond "why should the protagonist be straight?" If it's some minor blurb in a character bio, then why should it matter? And if it comes up on a more visible level in the game itself... well, come on, Lara Croft flirted at one of the male characters back in the original Tomb Raider, did that bother anyone? Don't be afraid to challenge your head as much as your thumbs.