This first link is to a blog, which shows excerpts of Paulson's speeches (in WSJ...need subscription), indicating he is coming around on the serverity of the housing market declines.  It also heads up by providing a quote which reveals much about the messy situation mortgage servicers face when it comes to the tide of problem loans they are dealing with:

In an interview, Mr. Paulson said the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007. He said he is "aggressively encouraging" the mortgage-service industry -- which collects loan payments from borrowers -- to develop criteria that would enable large groups of borrowers who might default on their payments to qualify for loans with better terms.

"We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off," Mr. Paulson said. "I've talked to enough people now to know there's no way that's going to work."
...
While he stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rate on the two million mortgages due to reset to higher rates between now and the end of 2008, he said that's "one idea." Mr. Paulson said he supports finding some way to develop "standard criteria that's going to allow for modification and workouts."

These are fine words.  But much easier said than done, and "Tanta" of the blog Calculated Risk excellently explains some of the dynamics of mortgage loan workouts, and why this idea will be more expensive and difficult than he probably thinks it is. 

An excerpt:  

"This means that the industry cannot do what it needs to do to defend itself. It will continue to take 70 cents [foreclosure] instead of 90 cents [workout], because it does not have the resources to commit to this problem, or because if it did commit those resources, the extra cost of staffing up and training and recruiting and so on would make the 90 cents scenario no longer achievable. Eventually the recoveries either converge--it's just as expensive to work out as it is to foreclose--or they don't, but only because the RE market is diving faster than salaries for workout specialists are improving, so that you end up with the choice of 70 cents or 50 cents, then the choice of 50 cents or 30 cents, down to wherever this has to go to sort itself out. Equilibrium in the housing market or servicer bankruptcy, whichever comes first."

I would add a bit of insight to her observations, all very good.  When problem loans come in, they do so at the borrower's timing, not the servicers'.  That means the servicer cannot even begin to schedule their arrival.  So of course, what few people they have are often completely overwhelmed, and they just have to deal with that.  Secondly, the clock is ticking on any given problem loan.  If a servicer takes too long in acting, their powers and remedies can actually erode, and the eventual losses, while put off, will on odds be much higher.  That is one of the major reasons why the old addage "your first loss is your best loss" has quite a lot of truth to it. 

So what can they literally and figuratively afford to do today?  The easiest and quickest course, which is to foreclose. 

I would also add that Paulson's comments could imply some kind of government sponsored workout plan.  I think it is dawning on these guys in DC that some form of leadership is required (for political reasons if nothing else), but they have really just started thinking of what that would mean.  It will take many months before even a theoretical plan is formed...by anyone.  In the meantime, foreclosures will continue to be the overwhelming choice of the servicers, in my opinion.