The program makes a lot of sense in some cases:  If a bank would approve a short sale to a third party buyer, why wouldn't the bank approve a short sale back to the existing homeowner for the same money, if the homeowner can afford the lower payments?

But there are reasons why a bank wouldn't do this in most cases:

--There is going to be a lot of overlap between the people for whom this program is appropriate and for whom a modification is appropriate, and I'd think the bank would rather do a modification than write down principal,

--Banks aren't making loans to people except for those who have good credit and solid incomes.  A third party short sale buyer seeking a mortgage would be required to have good credit and a solid income, and so I would think that those criteria would also be required of participants in this program-- otherwise, the bank would be better off forcing a short sale, all else equal.  But we know that a lot of these loans that are in danger of default were made to people with poor credit and spotty incomes, and the financial credentials of many of these folks have probably gotten worse in the recession.  I just don't see the banks being interested in writing down principal and still being stuck with a loan that is likely to default.

--Banks don't want to do anything that would allow people who will otherwise find a way to make their existing payments to get a break.  So I don't think they would ever offer a principal writedown to anyone who was not already in default.

--What about second mortgages?  I would imagine that this program will only work when there is one mortgage on the property.  I can't see a lender writing down half the principal on a first mortgage while the principal of a second mortgage was left untouched.

Also, I think I've seen some observers claim that widespread principal writedowns would tend to interfere with banks' "extend and pretend" strategies-- in other words, they can't write down principal even if they wanted to because of accounting considerations.