The administration’s $75 billion antiforeclosure program, which subsidizes lenders to rework bad loans, has been a big disappointment. One reason is that its usual method of modifying loans — lowering the monthly payment by reducing the interest rate — does not work well for jobless and underwater borrowers. Unemployed homeowners often cannot make even reduced payments and underwater borrowers need principal reductions to succeed over the long run, not lower rates.
And yet, the administration has resisted calls to revamp its program, citing cost and complexity. Another obstacle is that banks are generally loath to modify loans by reducing principal, which would require them to take big upfront losses that they would prefer to postpone.
I've finally concluded that the administration thinks the foreclosure process is an essentially necessary one, the way the free market fairies will fix the problem they caused.