Talk about blowing an opportunity, according to the article,they had 290k in savings when they decided to lay down their bets.

Actually, it looks like they never had $290k in savings.. read carefully from the article quoted:

With help from Steve’s stepfather and a bank loan, they came up with $290,000 for the property in Murrieta on which they planned to build their house.

Proceeds from a bank loan is not savings… neither is a loan from “Steve’s stepfather” which it also seems that the author of the article misses, because the author then says:

They spent $250,000 of their savings on design and grading.

Again.. a loan is not savings!! That is also a lot of money for design and grading.. are they trying to grade the entire 5.6 acres? The fact that they were jumping from mobile home to condo, to condo to try to fit the family in tells me that they did not have savings nor the income.

They spent 15 years moving from mobile home to condo to condo, trying to contain their growing family

Never use peak income to get a feeling of what you could afford…. I wouldn’t be surprised if $15,000 was a one month only (otherwise, why would you be doing the mobile home to condo jump routines combined calling a loan as savings..?).
Even when things started going bad, they had a chance to save a part. If they let the big house go and kept Sherry Lane, bankruptcy could have helped save the smaller house… but they had to keep the bigger house, couldn’t let go of the anchor as it weighed them down.
Um.. another strange statement:

When the construction loan for the custom house converted to a mortgage, the interest rate leapt to 8.5 percent.

Construction loans carry higher interest rates than mortgages because they are considered only partially secured (minimal value in the partially constructed structure until complete and past inspection – secured by the land only). I doubt that there was an interest rate increase, but I would not be surprised that it converted to amortizing.

Finally, it looks like they got a loan mod and then bailed on it. They should have kept paying the lower amount until it was ironed out. Defaulting on a trial mod is a guaranteed way to get foreclosed on..

They had a trial loan modification that lowered their $5,200 monthly payment to $3,000.

But after making three payments, no one from JPMorgan Chase & Co., which managed the mortgage, would send them the paperwork to make the loan modification permanent.

“They just don’t return calls,” Steve said. “I’ve called them 10 times. We’re filling out the paperwork again now, for the fifth time.”

With no paperwork for a permanent modification and no income, Steve and Lisa stopped making any payments, sending them into default.

Let me see.. no income. Maybe that is the real reason they stopped paying, and why the banks were nervous on completing the paperwork for the modification?

So in summary, they had been living from mobile home, to condo — as renters. Their income spiked because their income was tied to the construction business. Because they were feeling flush, got a loan from the stepfather and a bank loan for $290k and called it savings. Because they now had large savings and a growing income.. had to go no expense spared on their dream home and burned through $250k just on design and grading. Still feeling flush, they decided to speculate on the market and bought another house while their dream home was being built.

I don’t feel sorry for these folks.. they created their problems. They had many chances to avoid it. If they had stayed in the condo renting role, that spike of income could of gone to real savings instead of calling a loan ‘savings’. This real saving would have carried them through the lean times.