There is a fascinating article by economists Wenli Li and Michelle J. White called Bankruptcy, mortgage default, and foreclosure which discusses how the change in US bankruptcy law (which occurred right in the middle of the period where banks were lowering their lending standards) caused more problems related to housing mortgage defaults.
In 2005, major reform of US bankruptcy law sharply increased debtors’ cost of filing for bankruptcy. This caused a sharp reduction in the number of filings. Because credit card debts and other types of unsecured debt are discharged in bankruptcy, filing for bankruptcy loosens homeowners’ budget constraints and makes paying the mortgage easier. Thus the 2005 reform set the stage for an increase in mortgage defaults by making bankruptcy less readily available.
In other words, reducing the ability to file for bankruptcy increases the probability of mortgage default and as a result:
We estimate that the reform caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures to occur in each of the past several years – thus contributing to the severity of the financial crisis.
This makes the effort to create fair loan modification programs and prod lenders to work with borrowers that much more important.