That’s a reasonable argument...however:
The foreclosure process usually takes about 2 years once that “recovery” phase is reached. By that time many of these people may well have been able to refinance their loans.
Also - the investors never expect to make money beyond the fixed-rate period of the ARM. The idea behind doing a three-year ARM is that the loan would be refinanced and paid off at the end of the three years, which is also usually when the prepayment penalty was up. Meaning, the investor gets their money back and what they made in interest the three years prior is all they’ve made on it.
Prolonging the 3 years to 4, 6 or whatever prolongs that time they get their money back.
However, they will continue recieving monthly payments this way. With foreclosure, yeah, they’ll get 70% of it back, but it will take about 2 years with no money recieved between now and then.