Christopher, agreeing with this article from ClusterStock:

The underlying problem is the inability of some homeowners to pay their mortgage. Falling prices don’t cause foreclosures, no income does.

Does it? “No income” implies unemployment or underemployment, two issues that are on the rise now. But when the housing crisis began that wasn’t a problem.

The crisis started when, with higher interest rates on the market, those adjustable rate mortages became impossible once the “teaser rate” expired, forcing houses back to the market. As in any supply and demand scenario, sudden increase of supply forced reduction of prices, making it even more difficult to refinance.

With market prices stagnant or dropping, flippers were in trouble. The quick-gain investment deals relied on the promise of constant price increase, a concept that was close to fact of life for a few years. But regardless of the quality of the loan, credit history or job situation, a stagnant home pricing will break the chain and cause a foreclosure.

In Nevada and Arizona, 29% of all the prime mortgage loans written in 2005 were for non-owner occupied home purchases. In California, it was 14% and in Florida 32%. These are quality loans for people that have had no income problems, but that also never planned on living on those properties. The plan, since the beginning, was to sell shortly for a quick buck.

Yet, with housing prices falling, their business models went down the drain: non-owner occupied properties are 32% of the Nevada’s prime mortgage defaults, and 24% of Nevada’s subprime defaults. For Arizona the numbers are 26% prime and 18% subprime; in California, 21% prime and 15% subprime.

The existence of subprimes wasn’t the sole cause, but fueled the fire: more buyers with cash in hands would pump up prices, creating rosy invesment scenarios that attracted more flippers. When the teasers expired, they would be the first to have trouble refinancing, thus pushing prices even lower.

Non-Owner Occupied home purchases, 2005-2006

Non-Owner Occupied home purchases, 2005-2006

So yes, the problem is indeed the inability of some to pay their mortgages. But not because of lack of income; the main factor, as in any economic bubble, is the interruption of the self-feedback loop of rising prices. If a magical superpowerful entity would buy every foreclosure for 105% of the pay-off amount, prices would slowly creep up again, credit would become available, and the bubble would live on.

Luckily most of us don’t want that. And here I agree with Christopher: we are living in a bust, and the only alternative is to simply adjust to reality.