In the wake of the Obama administration’s announcement yesterday that it will seek new bank regulations “in the spirit of Glass-Steagall,” one line of thought posited that Republicans had been placed into a box, as they wouldn’t want to give the administration a victory on regulatory reform, but they also wouldn’t want to seem too friendly towards the banks.

But mass opposition has been the staple of the Republican strategy towards Obama so far, and early indications are that they won’t be any more helpful with the plan to reform the banks:

SEN. JON KYL (R-AZ): Let’s not be finding a bogeyman so that we can turn public attention away from what they’re doing wrong in the administration.

REP. SCOTT GARRETT (R-NJ): If we want the banks to lend, and we all do, if we want the economy to expand, and we all do, do you really want to start confining the banks and their ability to make profits in order to generate more capital to lend out to the people?

SEN. JOHN THUNE (R-SD): They think if they can create enough animosity toward Wall Street and corporate America, they get into this traditional sort of Democrat rhetoric and tap into the populist anger out there. For Democrats to be successful they’ve got to create a sense of class warfare and an us versus them mindset.

The names being thrown around the most as potential Republican targets for the administration are Sen. Richard Shelby (R-AL), who was the only Republican to vote against repealing Glass-Steagall in 1999, and Sen. John McCain (R-AZ), who along with Sen. Maria Cantwell (D-WA) has introduced a bill reviving Glass-Steagall.

But Shelby already toyed with the Democrats about approving the creation of a Consumer Financial Protection Agency (CFPA), only to lambaste the idea later as “folly and dangerous.” McCain responded to the Obama plan by saying “it seems to me that a number of the proposals [Obama] has move in [the right] direction, but I haven’t had a chance to examine the details.”

Garrett’s statement, meanwhile, basically implies that a profit earned in any fashion — whether its by ripping of unknowing consumers or gambling with federally insured money — is alright by him. But it’s not really the level of profits that we’re talking about here at all — it’s the way in which they were earned. Profits of the sort Wall Street has been seeing in recent years are only achievable by amassing a huge amount of risk, which is backed by American taxpayers because the institutions involved are systemically important. It’s the merging off traditional deposit banking and commercial lending with a hedge fund mentality that is the problem Obama’s plan seeks to address.

“There’s no denying that banks have made a significant move from traditional commercial lines of business, like individual and small business lending, into higher-risk/higher-return investment banking lines like proprietary trading,” said Sen. Kirsten Gillibrand (D-NY). “If we hope to avert the type of catastrophic meltdown we witnessed last year, we must contain the levels of risk and activities the big banks undertake.” And if the GOP wants to play defense for Wall Street, let them do it, so long as they actually have to take votes affirming that position.

According to the New York Times, the Obama administration is looking to revamp its foreclosure prevention program, the Home Affordable Mortgage Program (HAMP), which has been limping along for several months now. The expected changes will streamline some of the income verification procedures and may “include greater assistance for homeowners no longer able to make mortgage payments because their paychecks have shrunk.”

Calculated Risk was unimpressed, writing that the proposal “sounds like another delaying tactic.” And yes, simply streamlining some of the documentation issues on the borrower side doesn’t seem like it will do much good, considering how slowly even fully documented modifications are moving and the trouble (or lack of interest) that lenders have had getting their end of the deal in order.

But the Times also reported that the administration has “begun to consider a new push to reduce loan balances.” “They are looking at equity forgiveness,” said a financial industry executive who speaks regularly with Treasury officials. “There have been a lot of meetings on that.”

If true, this is a good sign, as “underwater” mortgages (where the homeowner owes more than the property is worth) are still a huge problem for which we have few solutions. According to the latest data, about one in four U.S. borrowers is underwater, and not only are most mortgage modifications not reducing principal for borrowers, but many are actually increasing the principal owed.

According to a new study from the State Foreclosure Prevention Working Group, a collection of 12 state attorneys general and three state banking supervisors, more than 70 percent of modifications are pushing borrowers further underwater:

Despite the growing number of loans that are “underwater” (where the homeowner owes more than the property is worth), only 9 percent of loan modifications in October 2009 involved reducing the unpaid balance by more than 10 percent. More troubling, more than 70 percent of modifications result in an increase in the principal amount owed. Given the correlation between negative equity and likelihood of default, the failure to write down principal in connection with loan modifications is a glaring flaw in the current crisis.

“The reality is that the housing bubble has burst,” said Mark Pearce, North Carolina Chief Deputy Commissioner of Banks, and those not addressing principal reduction as a means of reducing foreclosures are “close to being in denial.” Nobel Prize winning economist Joseph Stiglitz said today that a government priority should be figuring out how to write down loan principal.

This week has seen extensive discussion of regulatory reform and changing the way in which banks do business. But that won’t have much of an effect on people’s day-to-day dealings with financial institutions. Cutting principal, however, is something that directly and plainly affects people who are in trouble. And it will help the housing market, which, after all, is where this whole economic fiasco arose. The administration chose not to push for mortgage cram-downs, which would have helped with this problem, and hopefully it has learned its lesson.