Foreclosure/ what happens?

Well, we stopped paying our mortgage in July of 08......my pay got cut by 75% then I found another job...my old job. Still lost about 50% of my income. So, then my wife started calling the bank everyday for months. Trying to do a loan modification to avoid foreclosure. On top of that, our house that we put $140,000 down on and paid $640,000 for, is now selling for $400,000.........brand new, with upgrades from the builder. So, my question, in great frustration, is this: why wouldn't the bank modify the loan. They're going to get less than $400,000 once it's bank owned.

So with the months of calling the bank to get a loan modification, they finally did...........only one problem.... OUR PAYMENT WENT UP!!!!!!!. Are you kidding me? Why not short sale the house back to us, for what they will get? doesn't that make sense, rather than foreclosing?

Fortunately, our kids are young enough that it probably won't affect them too much to move,.... maybe our oldest..... which is the hardest of all.