Well, they ARE collecting, when PMI is in place. The PROBLEM is, with these substandard loans, the mortgage brokers were convincing people to "avoid" pmi costs, by taking TWO mortgages - the second would be for 20%, the first for 80%. So many, many of these loans, have no PMI coverage!
Plus, before the lending institutions can collect, they have to foreclose and auction off the property - and that costs money, for EACH property.
The lenders are asking for help, because of Sarbanes/Oxley - SOX. The LAW says, the lenders have to report the "value" of the loans. Well, when no one wants to buy the loan, the "value" is zero!! So that makes it look, on paper, like their assets have dropped dramatically. They can't convert that zero into the property value, until after they foreclose and auction off the property
It's not TRUE, in reality, that the loan has dropped to a zero value, because the PROPERTY is still worth something - it's just no one wants to buy the mortgage on the property.
SO, the PMI doesn't apply. The mortgage doesn't even have to be in default! It just has to go to "not sellable", for the lender to not be able to use it as an asset. And with all the subprime market fallout, well, no one is buying mortgages, especially the higher risk ones.
Hope that helps.