That's a lie people tell themselves and repeat to others to justify wrongdoing.

Then why did they take that loan? There are a very limited number of explanations:
1. They paid more than they should have (not the bank's fault - they are not your parents to say what you should or should not spend your money on) for the house.
2. The house has become devalued since their purchase. Again, not the fault of the lender, unless their actions deliberately devalued the house.
3. The buyer deliberately chose to pay above the value of the house for some other reason that would not be assessed in the value (i.e. convenience to his job or some other locale important to him, particular aspects of interest to him on the property, etc)
In none of these cases can the lender be faulted for unwise decisions made by the buyer/borrower. Their business is to lend money and prudence dictates they determine whether or not their customer is likely to repay, but beyond that it is not their fault. Arguably, they should not be loaning money to criminals who cannot or will not pay them back, but that does not excuse such behavior on the part of the debtors.

A person who defaults on a loan and claims the bank should have known better to lend them the money (which is what you are suggesting with your insinuation about people with too-expensive loans) is no different than Bernie Madoff excusing his actions by claiming that people should not have invested money with him that they can't afford to lose.

Not only that, if the borrower defaults because he claims that his house is not worth the value of the loan, he is defrauding the bank by sticking THEM with a house that does not compensate for their lost money! If he borrows $400,000 and puts up a $250,000 house as collateral, and defaults on the loan after paying back only $100,000 of the principal, the bank is getting gypped by HIS poor choices.

What is this gibberish? This is not even a coherent sentence and does not make your point at all. I THINK you are claiming the position I refuted above - that the banks are responsible for all the loss if their clients fail to pay it back, so they should not make the loans in the first place, which is pure crap. You forget that there is constant political pressure to force banks to loan money more easily and to lower income people. Such people are the exact kind who are least able to pay back loans, but when the banks refuse, the media, politicians and community activists scream and shriek about discrimination against poor people or minorities (and never mind that orientals have far more success obtaining loans and credit than occidentals do, even from white lenders! ).

<qutoe>Or to be less wordy, the banks screwed things up now want everyone else to place nice and keep paying.
Prove that it was the banks who screwed things up. On what do you base that statement?