I agree with comments below, that you need to start the eviction process because it will be much easier to sell and that new owner won't want that tenant anyway since he has not been paying. But what I have seen in cases where the bank, for whatever reason, has not foreclosed, is that they will sell off this loan and the new bank will quickly send you an NOD Notice of Default and start foreclosure proceedings. Forget the loan mod (very few ever work out).
I know this is an older post, but if you have not already, I suggest you get an agent to start working on the short sale yesterday. Also the mortgage debt relief provisions for homeowners in the federal tax code, first enacted in 2007, expired at midnight on December 31, 2012. But the fiscal cliff bill enacted at the 13th hour by the Congress extended the relief through the end of 2013. There is no indication that this will get extended again, which means that all principal balances unpaid by the homeowner and forgiven by the lender would will be treated as ordinary income to the homeowner.
3 Leaf Realty