"...it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while

"...it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process." Not the way it works, for two main reasons. First, people who owe less than the house is worth are generally not foreclosed on - in the worst case they just sell and keep whatever equity they get away with. Second, legally the bank can't keep any surplus. If they foreclose on your house, they have to sell it at auction and keep only up to the amount you owed. They would have to give you any excess. At least for houses, banks aren't allowed to profit from foreclosures.