- The best way to modify an underwater loan is to reduce the principal balance, lowering the monthly payment and restoring equity. But for the most part, lenders have refused to reduce principal because it would force them to take an immediate loss on the loan. Lenders also have vehemently — and successfully — resisted Congressional efforts to change the law so that bankruptcy courts could reduce the mortgage balances for bankrupt borrowers. The administration decided not to press lenders to grant principal reductions in the flawed belief that simply making payments more affordable would be enough to forestall foreclosures. It hasn’t. The administration also didn’t fight for the bankruptcy fix when it was before Congress last year despite President Obama’s campaign promise to do so.
The administration supported bankruptcy cramdown in theory, but by all accounts expended no effort to get members of Congres to vote for it. And I don't buy into the theories of administrative helplessness. They don't control Congress, but they certainly have influence.