Principle and moral hazard aside, a lender should do whatever possible to maximize his net receivable on the loan. If the foreclosure route causes greater losses than principal reduction, the lender will be a fool to go that way. Keep in mind that foreclosure of a large fraction of a community is not the same as foreclosure on a few individual homes. If Detroit and its surrounds are replicated on all large cities, this country will resemble Afghanistan pretty quickly. Everybody has an interest in preventing that.
