Condensed from an article by Charlie Martin.
For various reasons, the housing market stopped going up (
oil IMO). House values stopped growing and in fact started decreasing. At the same time, interest rates started to go up as the Federal Reserve Bank thought inflation was becoming a danger. So people who had bought these special subprime mortgages saw their variable interest rates go up, and with them the house payments; at the same time, their houses were worth less!.
It got to be hard to refinance them and people started losing their houses to foreclosure. The banks and the other companies that held MBSs weren’t broke but they were “house poor”: lots of assets, no cash.
-----------------------------------------------
So the banks and investors got all or some of their money back, and the buyer was left to suck it up. I still believe it's best for the government to bundle and auction them off, there's a lot of money there and it won't go super cheap...imo.