I'm a bank. You're a homeowner. You borrowed money from me so that you could "own" the roof over your head. Let's say it was a $100k home, you got FHA financing so you had to put like $3k down, and you're paying $500 a month at 5 points for the next 30 years.

On your books, you "own" this home, you just owe me the money for it. You're going to pay $500 a month for the next 30 years and you have a roof over your head.

On my books, you "owe me" this home, you just live in it. On my balance sheet, you're $193k worth of assets. I get to book not just your home as my holdings, but the interest you're going to pay.

Further, I get a leverage factor of about 30 on your home. Which means that although you're ~$200k worth of money to me, I get to loan out $6 million dollars because of your $500 payment over the next 30 years.

Kinda batshit, right?

So. You lose your job, or you get a pay cut. Now you can only afford a $250/mo payment. However, the real estate market has cratered which means your house is only worth $50k. Yet there you are holding a note for $100k. Your perspective is that the bank ought to accept the fact that $250 of your dollars is gone every month.

But I'm the bank - and until I file papers, your mortgage is still real to me. I still get to keep on lending. And chances are excellent I'm a publicly-traded bank, which means I have quarterly earnings reports, which impact my stock price, which also impacts my ability to lend money, which impacts my ability to turn a profit. So I'm going to ignore you for as long as I humanly can.

Eventually we'll have a come-to-jesus where I recognize you're not going to pay your $500 a month mortgage. I have two choices: 1) Take that $50k hit, which becomes a $3M hit over the next 30 years, which I have to realize RIGHT NOW 2) Foreclose on your ass, which doesn't actually become a hit if I can turn that house around within the limits of my earnings reports, and even if it does I can probably find a greater fool who will take less of a hit than the one you're taking, and besides, you're already proving to me that you're a credit risk so fuck you, charlie.

Here's the thing: that money has gone to "money heaven." It's gone forever. But if I, the bank, can hide that fact for as long as possible, I can keep acting as if you're paying me into the future and lend as if that money were in my coffers.

That said, B of A has plans to modify 630 THOUSAND loans next year. That's a write down they're going to take because they really don't want anybody sticking their noses too deeply into their books so they're throwing a sop to the proles.

Fun tidbit: Washington Mutual was one of the main forces behind the bankruptcy reform act, which made it much harder to walk away from credit card debt. This made their credit card division much more profitable. Unfortunately it did not make their customers any richer, so when they were given a choice between declaring bankruptcy to clear credit card debt or paying off their credit cards while neglecting their mortgages, they let their mortgages rot. And since most of them had WAMU mortgages, WAMU proceeded to implode from their home loan division while their credit card division was plump and happy.

The foreclosure crisis, in a nutshell, is a whole bunch of people playing musical chairs. They don't want to be the ones left holding the bag when it is revealed that their assets have gone to "money heaven." The fact that the money has gone to heaven is not in dispute; the only question remaining is whose money went.