Not all homeowners are capable of qualifying for a loan mod. While I believe the requirements for a loan mod need to be seriously overhauled, there are some that simply will not work out. There are high stats about the failure of loan mods....people falling behind again. I think the banks provided 'crappy life jackets" to drowning swimmers. Of course, they took the life jacket that had a hole in it over nothing, but it was a bad offer in the first place. If the banks had realistic workouts, many properties would not foreclose and would not come on the market. But, some situations are such that foreclosure or deed in lieu is the only answer.
The expectation of "realistic" workouts should have been tied to the bailout money. Shame on the government for handing out billions without proper oversight.