There are several possible options:

More short sales. Short sale activity is already increasing, and the Treasury introduced the Foreclosure Alternatives Program to help with short sales and Deed-in-Lieu of Foreclosure transactions. However servicers are very afraid of short sale fraud (non-arm length transactions), and short sales are also distressed properties – pushing down prices – something Treasury is desperately trying to avoid.

Encouraging servicers to write down principal. This would be very expensive, and if paid for by taxpayers – it would be very unpopular because it would appear to favor speculators over the prudent.

Converting homeowners to renters. This is something Dean Baker suggested, and is kind of a Single Family Public Housing program. This would avoid the flood of foreclosures, and the banks could sell the homes over several years.

None of these programs is especially attractive, so I expect more delays and “can kicking” that will keep foreclosures elevated for years. I’ve felt all along that HAMP was just a delaying tactic. By restricting supply, the program has pushed up house prices a little and that has helped the banks raise capital. Now that the capital raises are over, maybe it is time to just accept the consequences – and let house prices fall to market clearing levels.

-excerpt from “HAMP Seen Hurting Housing” from Calculated Risk.