I am not sure if your experiences are like mine, but here in Jacksonville the subprime lending is not totally to blame for the current woes of our industry.  One of the most difficult issues for new home owners to deal with is the reassessment of real estate taxes.  This is particularly pronounced in new home owners who bought directly from builders.  Essentially, these home owners purchased before the taxable values had been reassessed from vacant land to an actual home.  In cases where the lender requires an escrow account for taxes and insurance (particularly when the buyer purchased the lot before having the home built) the aggregate adjustment rules dictate that the lender cannot require more than a certain amount over what the current taxes are.  What happens next is particularly devastating.  The new home owner will receive a notice from the lender stating their escrow account is overdrawn and the home owner must either pay the overage now or spread over twelve months.  In these situations the home owner will now have the payment increase not only by the current tax amount but also by the shortage from the prior year (in essence, doubling the new tax rate). 

I had a situation last year, where my seller had bought a $500,000 home, and neither the lender nor builder had advised him that the taxes would increase.  The original lot purchase was $60,000, and his escrow was only $83 per month.  When the taxes readjusted the new amount was $690 per month, and he had to pay back $600 additional per month for escrow deficiencies.  His payment increased an extra $1,300 per month!  Added to this, his "interest only" 6% teaser rate increased 1% to 7% for another $395.  When all was said and done his payment had increased by almost $1,700 per month.  So he called me to list.  Unfortunately, his $500,000 new home sold for $360,000 with a $10,000 seller concession.  The bank accepted a $321,000 pay off on a $475,000 note.  I have no doubt that this individual could handle the $395 increase in his interest only mortgage, but the $1,300 extra for taxes sounded the death toll.