All banks and Fannie Mae should have an estimate of what impact loan recasts will have, as written about by "Calculated Risk" who lives in Irvine, California. I assume this was a major aspect of the "Stress Test".
Banks almost certainly don't have a very good estimate since it's very unlikely they have compared current valuation on each mortgaged property to the mortgage value, since this would cost money - and besides, bankers have a long history of being the sort of people who prefer being surprised by "unexpected" events.
Banks are obviously using a rough econometric model using unemployment, current default rates etc, and I'm sure it was all done in an Excel spreadsheet. When I first moved to Los Angeles I briefly worked for Hale Systems which had a software product on mainframe, SLP, which most banks used to forecast their future asset/liability mismatches. There were additional modules and tools from other firms to forecast loan portfolio behavior, but none of it is too sophisticated as you're missing the information you need to really know what's going to happen - because banks didn't want to pay for it, and worse still most CFOs would not understand it.
I worked frequently with the CFO of Glendale Federal which was the original bank to package mortgages in a large scale manner. It was hardly a surprise to see them taken over by the RTC as the CFO apparently knew far less about bank balance sheets than I did. This surprised me, given the fact that my knowledge about banks was entirely theoretical, having previously worked for Chevron. I was good friends with a woman who worked in Glendale Federal's small mortgage securitization group, who concurred that their CFO was a total imbecile as she assured me is the case with most senior bank management. She and her boss were hired by Bear Stearns when GlenFed failed, and they became the nucleus of Bear's mortgage syndication operation.
The real problem is that recasting loans is simply nibbling at the edges of this problem in states where the majority of outstanding mortgages are "underwater". In Japan, home owners have continued to dutifully pay on mortgages which far exceed the value of their homes since 1990. I'm extremely doubtful that Americans share these same cultural values. Reducing mortgage rates and extending loan duration works for people with a small problem, which I really think is a small percentage of the whole.
If you have a $500k mortgage on a home currently worth $300k, are you more likely to continue making payments if your interest rate is reduced to 2% - even if the bank would recast this loan?
Take my friend with his $425k home in Palm Springs, now worth $225k. He has a Credit Score of 814 with a 4.05% interest rate on his mortgage of about $375k. He was earning about $150k, and has seen that reduced again, now to $40k as their firm is not bringing in new business. He says he's eating into his savings at the rate of $3,200 a month, but I suspect it's closer to $5k a month since he has a lot of expenses loaded at the end of each year he's currently ignoring.
He keeps paying his mortgage because "the recession will be over by the end of the year and they'll soon get new contracts". Except none of the studios are letting any contracts currently and there' no reasonable prospects for work. So his retirement savings have been reduced by 35% in the market and he's draining them now by likely $50k a year to pay the bills.
There's a lot of mortgage paying "home owners" like him. They live in a room with a limited amount of air, which they're currently exhausting. One by one they'll run out of air and stop paying their bills, or decide to walk on their mortgage to prolong their air supply for food and a less elegant place to live.
You may likely be in my position where you can live on your capital in some manner for the rest of your life, even if interest rates were zero. There are very few Americans in this situation. Most begin living on a ticking deadine if their income is reduced or interrupted.
More foreclosed homes reduce home prices further which makes "the bank and mortgage problem" larger.
Banks taking TARP money and Fannie Mae recently ended a 90 day foreclosure moratorium. As we can see from the "Notice of Defaults" in California, the increasing drumbeat of foreclosures will soon resume it's consistent climb within another 90 days - count on it.
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