So what to do?
"So before the bank forecloses on his first house he is taking advantage of falling real estate prices to buy a new home for $285,000, with a fixed rate mortgage he can afford. Once inside the new home, he can either sell the first property for a huge loss to the bank or walk away completely and let it slip into foreclosure."
Wonderful, just great. Things are so screwed up people are buying a second house a the current market value and then walking away from the first one. They're taking the foreclosure hit on their credit to avoid paying the difference. It doesn't say how long he's owned the first home but let's assume he's owned it for about 5 years and further assume he had a 5/1 ARM that he recently resigned. So, $4,000 X 12 mos X 5 yrs = $240,000. That's nearly the total cost of the second home. From an economic standpoint he would be crazy to stay in his current position. He gets the second house and takes the hit to his credit and he's now in a bigger house for less money with a fixed note. It's either that or lose the house entirely, take the hit and be left with no house and a bad credit history which makes even renting difficult.
The howler in this one is the lenders now crying foul and calling the practice deceptive. I can't tell you how many lenders gave me absurd numbers for my first mortgage. They would routinely "forget" to include silly things like taxes and escrow and PMI.
The borrowers are certainly to blame for taking out a loan they can't afford to pay but the lenders share the blame. They made loans they knew the people couldn't afford. They also knew they'd package and resell those loans as CBO's and they'd be off the hook. The real money makers in the recent real estate boom were the originators. The resellers made some money in the middle and the wholesalers got slaughtered.