Two words: moral hazard. As pointed out above, if banks started doing this, lots of FBs and near FBs (many of whom already have bad credit) would simply stop paying their mortgage until they get their loan balance reduced.

Of course, this doesn’t preclude a bank, on a case by case basis, from reducing someone’s mortgage. After all, the bank already incurred a loss, and then holding (owning), conditioning, and selling the house will only result in further losses.

Obviously this won’t be industry policy. Not even a particular bank’s policy. But it may happen here and there.