The Obama administration has just released the details on yet another "major" push to help homeowners who are underwater on their mortgages--a number now estimated at something like 20% of all homeowners.
The last big pushes yielded little in the way of results. The problem we thought we had a year ago--vulnerable homeowners being rocked by resetting "teaser rates" on their adjustable mortgages--turns out to be much less pressing than we thought. Instead, we an income problem: a lot of homeowners whose income has fallen too far to afford any reasonable payment on their homes. This is actually a particularly tragic subset of a larger problem, which is the market rigidities introduced by underwater mortgages.
Until around 2005 or 2006, home equity actually cushioned other income shocks. If anything bad happened, you could always refinance, or in extremis, sell. Now people who have had income shocks can do neither. People who need to move for career or family reasons are also trapped.
That's why many people have suggested principal write-downs. But this has run into multiple problems.
1. The ownership structure of mortgage securities makes this very complicated.
2. Banks reasonably fear that if you make it easy to demand a principal reduction, everyone will do it, causing them to lose money on loans that would otherwise have paid off