Aren’t buyers somewhat to blame for the housing bubble, too?

Well, yes, in some cases, though most of the writing we’ve seen on the subject either commiserates with them or is straight financial analysis of what this means for the economy.

But, plenty of people who bought homes on 2/28 mortgages, other interest-only mortgages negative amortization mortgages, or other creative financing, were not working poor families buying their first home with a subprime mortgage they didn’t understand fully.

Instead, they —

A: Knew exactly what mortgage they had and what risks it might entail, and/or

B: Were buying second or third homes as either rental or resale investments, and therefore should be no more commiserated with than people who similarly overextended themselves in the stock market, and/or

C. Were solidly middle-class to somewhat upper middle-class couples trying not just to keep up with the Joneses but be pacesetters buy buying more house than they really needed, except for show; therefore

D: They’re smart enough, or were investing enough money to pay a lawyer to be “smart enough” for them.

In essence, this is what much of the housing bubble derives from — a mortgage world treated by brokers just like a stock market.

Read on to get more of the picture:

When Linda Martin refinanced the mortgages on three different houses nearly three years ago, she thought the lower monthly payments would help her save more money for retirement.

Instead, the Lakewood, Colo. skin-care specialist is sinking in financial quicksand amid a widening mortgage morass that's pulling down home prices and threatening to drag the U.S. economy into a recession.

“I’m hanging on by a thread, not knowing whether I am going to be living in a car in six months,” said Martin, who declined to reveal her age.

Martin is among the hundreds of thousands of borrowers saddled with “option” adjustable rate mortgages, risky loans that dangled bargain-basement introductory payments and also let borrowers defer a portion of interest payments until later years.

But, the piper is now demanding to be paid.

Here’s why: When borrowers pay the minimum monthly amount on an option-ARM, they aren't covering the amount of interest accruing on the loan. To compensate, lenders add the amount of unpaid interest to the mortgage's outstanding debt.

Option-ARMs also allow for a higher monthly payment to reduce the loan's principal, but most borrowers only make the minimum installment. At some lenders, 80 to 90 percent of the option-ARM borrowers are paying the minimum amount.

So, a homeowner who originally borrowed $250,000 under an option-ARM could end up owing an additional $5,000 to $10,000 after making the minimum monthly payment for a year, depending on the terms. …

Martin doesn't think she is upside down on her loans yet, but knows she is getting uncomfortably close as home prices around her neighborhood continue to sag.

When Martin refinanced the mortgages on her home and two rental properties in October 2004, she said she owed a total of $735,000. The combined debt now stands at $777,000 and is growing by more than $2,000 each month.

Martin says she would have never refinanced if a mortgage broker hadn't misled her about how the new loans worked - a frequent complaint among borrowers with option-ARMs.

This gets to point D above. If you’re buying two additional houses for rental property, and you aren’t 110 percent sure about mortgage details, why in the hell aren’t you hiring either a lawyer or a financial analyst or accountant?

Anyway, getting to the economic analysis after all, here’s more of just how bad the problem is.

Last year, negative amortization loans accounted for 9.9 percent, or $350 billion, of all mortgages nationwide, up from just 0.4 percent as recently as 2003, according to LoanPerformance.

The mortgages were particularly popular in high-priced real estate markets like California or areas like Nevada, Arizona and Florida, where speculators were buying homes as investments instead of places to live.

Option-ARMs accounted for nearly 22 percent of the mortgages made in California during 2006, according to LoanPerformance. Other hot spots included: Nevada (15 percent), Hawaii (13.3 percent), Florida (12.2 percent), Washington (10.9 percent) and Arizona (10.6 percent).

If many of those loans go bad, major option-ARM lenders will likely be forced to erase some of the profits that they have already booked from the exotic mortgages. Under an accrual accounting method allowed by regulators, option-ARM lenders routinely record the uncollected interest as income even though the money may never be paid.

This phantom income has swelled along with the use of option-ARMs. For instance, Washington Mutual recognized $706 million in uncollected interest from negative amortization loans during the first half of this year, a 61 percent increase from the same time last year.

Investors already appear to be seeking shelter from the possible financial storm ahead.

Washington Mutual's stock price has dropped by 21 percent so far this year while Countrywide's shares have shed 34 percent. Another major option-ARM lender, IndyMac Bancorp Inc., has been even harder hit, with its stock plunging by 55 percent since the end of last year. The sharp downturn in those three stocks alone have wiped out a combined $24 billion in shareholder wealth.

No, I don’t feel sorry for mortgage brokers engaging in technically legal but duplicitous accounting. And, I hope that Congress does NOT consider an equivalent of the 1980s S&L bailout should things get that bad.