Right... They should just let the mortages go, let the delinquent borrowers have the property and we can all dwell happily amongst the rainbows and unicorns.
Let’s just ignore the fact that when you reward behavior you get more of it.
That's the problem with this foreclosure mess. There's no good solution.
Do you let the formers owners live in these homes without paying their mortgage? As you said, this rewards irresponsible behavior. So what to do? Leave the houses vacant? We're seeing what happens with this course of action. Tear 'em down? That's a possibility. Turn them into Section 8, low-income housing? Some municipalities are doing just this, much to the dismay of the neighbors.
This is just a big, ugly mess.