Well, I won't send you to hell for pirating, there'll be plenty of other people to do that. But I don't condone it either.
To answer your question, I have two reasons:
1) Xbox Live: The risk of playing a burnt game online (higher if it's a not even released game like that Gears 2 episode a few months back and Halo 3 before that) is that somehow MS can detect that you aren't playing on an official disc and give your xbox console a lifetime ban, meaning no xbox live ever for that console.
It's unlikely that many people would care about that, seeing as how we all went fine on the PS2 with 99% of games having no online content whatsoever.
2) This ones the more likely. RROD. As you are aware, console warranties are voided the second the case is opened and since alot of early 360 modding involved opening the case, only those brave enough pirated games, and the rest of us decided they wouldn't run the risk of having a completely warranty free console.
Even though I've heard that moddings advanced so that opening the case isn't required, I still suspect that the accepted opinion is that modding requires the case opened, case opened voids warranty, we all fear RRoD.
Also don't forget the PSP's been out for way longer, so modding would have been available whilst the 360 was still in R&D.
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