Yes, the whole thing was a ponzi scheme, all of it.

In the most truncated form....

Every dollar of DEBT you - yes YOU - hold is magically and amazingly turned into anywhere from $9 to $30 in assets on the books of a financial institution.

They, in turn, expected to collect your debt payments over time, and the contracts to collect that debt were bought and sold, and packaged and re-sold and re-sold. In case the contracts went bad, the contracts had insurance, sold by companies like AIG, which paid off if the debt stopped "performing" (you stop paying). The premiums on the insurance were based on the risk, and the risk models simply didn't have any ability to deal with the idea that housing prices would fall (among other things).

Well, your default on a loan triggers both a payout on the contract insurance AND triggers a foreclosure action. Remember that $1 in debt becoming $9 to $30 in assets? Whoops! You have a $200,000 house with a 30 year mortgage, the lifetime value of that loan was about $550,000 to the lender, but if foreclosure was needed, they "knew" that there would be no real loss, because if you defaulted after 5 years of interest-only payments, well, the bank didn't really lose any principal, after all they could sell the house for more than the principle of the loan. Except now they can't. And now, that mortgage note - the one that was valued at some dollar amount, contracts on which were valued at some dollar amount, and insurance that would pay out on the (unexpected) default on the loan - all of these "assets" have turned into massive, massive liabilities.

By far, the very best article - it's long but worth it - on this subject is in this month's wired magazine:

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant