“As a bank, you may think that the $400,000 that you lent on a $500,000 home is still safe until Countrywide forforecloses (because they lent 125% of the appraised value) on the house next door and puts it back on the market for $350,000”.

Not if you require to put another 20 percent down to purchase the same type of home. How many buyers will have another $70K sitting so they can take advantage of this situation. Probably not many. That’s why even though there is a world wide real estate bubble, most of the countries will NOT suffer as bad as in California.