What is wrong with the foreclosure/ REO process?

What is really happening in the foreclosure / REO real estate process / market?

Is it possible there is a corrupted process at the very top (wall street executives, wall street investors,

bank executives, hedge funds, etc.)

Here is a thought: We know banks are not willing to reduce the principle loan amount for owners 

under water. That can easily be measured by the number of completed loan modification that include a 

principal reduction. Very (very) few: About 49,000 of all the proprietary modifications completed reduced 

both the loan principal and monthly interest payments. Out of how many foreclosures again? About 1.2 mil? 

The ones that are done are merely to keep the politicians at bay so the banks can say they are following 

their guidelines.

But.......banks are very willing to foreclose on any property, and sell the properties in REO bulk at 55-60% of current market value. This allows rich "investors" to buy these properties, and then turn around and sell them back to the consumers market at 85% of value and make 20-25% of the investment in about 4 months. We are talking about $60 - 100 million REO investment per deal (read "tape") . You and I cannot take advantage of these incredible returns, as we have no "insider" at the bank who will give us that opportunity (and I also have no $100 mil available in my bank account). These opportunities go to "connections" so they can make a ton of money on foreclosed properties. Pretty easy money, no? Then here is this question: If banks are willing to write down the REO to 60% of value, then why  can they not do a principal forgiveness for say 25% to the home owner? The write off to the bank is the same "loss" no? The big difference is that in the first scenario, the profit goes to the big investors at wall street. In the second scenario  the "advantage" goes to the home owners.

So what would be the difference in the real estate market today (read values and prices), if we had used the second scenario? Well for sure there would be a lot less "distressed" properties. The home values would not have declined as much, which also means there would have been much less of a "recession" in real estate, and home owners would have felt very good about staying in their homes, so no strategic defaults, and thus a much "happier" consumer who might have been able to spend some money on the economy.

When will we learn to do the right thing for all Americans?