It is not necessary to modify loans simply because they are underwater.  Being underwater on your home is not really a big issue unless you want to move or you can't make your payments.  Most homeowners who are underwater continue to make payments and live in their homes.  Many are probably not even aware that they are underwater.  They are working, making their payments, and living their lives.

The high level of underwater homeowners is definitely of concern, don't get me wrong, but only a small percentage of those underwater homeowners will default unless there is unexpected further increases in unemployment or other economic shocks.  There's no reason to expend scarce funds to modify loans for people who aren't in danger of defaulting.