Unfortunately, your middle paragraph sums up the situation that a great many Americans find themselves in. I wouldn't go so far as to say most, but certainly a very large minority live nearly exactly like this.

Regarding your lead question:
Somebody who isn't taking the risk of default on themselves.

It is and was obviously and criminally insane, yet somehow nobody is being called to task for it.

No person in his right mind would do so. Working in foreclosure defense, I have seen loans from 2005 or so where banks refinanced 100% loan to value for borrowers in their 70's. It's beyond insane.

What you are describing is a situation in which a homeowner gets a parking ticket and has to default on his mortgage because he cannot afford to pay both.

Go ahead and laugh. We deserve it--and besides, this is an accurate description. In my county, a prominent billboard on all the public transit buses says something to the effect: You shouldn't have to choose between paying your phone bill and taking your sick child to the doctor.

It's reality. Americans bought up (still?) everything in sight and spent every last dime because they thought the party would never stop. One slight change--and bang, the troubles begin. There is no plan B, not even a Plan A. No thought for tomorrow. Instant gratification.

but nobody with a big payment reset was going to make those payments

And those payment resets and the sudden transition to a housing market surplus drove down prices and destroyed any equity held by those who had paid 20% down. This same price drop also undermined the value of all MBS. These were deemed to be extremely safe investments and were widely held. They were deemed "safe" as house prices generally increase or hold steady. Banks which held MBS were now under capitalized and those who had invested in derivatives were technically insolvent. And so the house of cards began to collapse.

This collapse would have occurred even if the price of oil had remained steady. I believe the rise in the price of oil was likely a result of the housing bubble (and not the cause of the bubble's collapse as the Gail thesis argues).

Think of it. Thousands of people suddenly had access to credit they had previously been denied. Housing became increasingly "affordable." The result of freely available credit was a rise in the price of houses as buyer A can now easily outbid buyer B. The house price rise sparks a boom as it provides false confirmation of housing as a "fail safe" investment, and this growing bubble draws more builders, more lenders, and more buyers.

An identical boom and collapse took place in Holland circa 1650. This one concerned tulips rather than houses but the mechanism was much the same.

http://en.wikipedia.org/wiki/Tulip_bubble