This makes sense to me:
Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
If the goal is to really help people keep their homes they would need to let home-owners lower their loan balance to match the market value of the home.
Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”
I don’t think you will see loans being modified to reduce the principal balance which means many more foreclosures in 2010; the positive side of this, if mortgages are made available, is many people should be able to buy very affordable houses. The down side, is that more foreclosures will lower home values even more, encouraging more people to go into foreclosure.
I am not sure their is a good choice in how to deal with this crisis, almost any strategy is going to be pretty painful.