From the WSJ:

Keeping Families Above Water
May 8, 2008; Page A2

The latest flash point in the debate over the nation’s bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle for less than the full debt, even if it may cost taxpayers some money?

The White House and Treasury say “No!” House Financial Services Committee Chairman Barney Frank and other House Democrats, with the quiet backing of Federal Reserve Chairman Ben Bernanke, say “Yes!”

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody’s Economy.com estimates that one in roughly 12 American families with mortgages — four million in all — already owe more than the current value of their homes. They are said to be “underwater.” The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won’t, and are at risk of losing their homes.
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In ordinary times, a lender shouldn’t need prodding from the government to do what’s in its self-interest. But these aren’t ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the “speculators” who bought homes they don’t live in or those who lent to them. And there’s broad agreement that those who bought more house than they’ll ever be able to afford are going to lose out. The debate revolves around the “preventable foreclosures.”
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The White House condemns this as a “bailout” and says it won’t work. As the Treasury argued in a recent PowerPoint presentation: “Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators.” (It’s a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices — “a relatively novel phenomenon,” Mr. Bernanke labels it — and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn’t be underwater.