who's getting wrecked in this scenario? Even the people who own the houses are by-in-large so way above water on their equity.

In my view, the problem is with the municipalities. Many counties are leveraged to the hilt on muni-bonds that were financed on the promise of increasing property tax. These counties are about to get destroyed. Too bad. They should default, but the Federal govt won't allow it. It's their chance to bail them out and further tighten the controls across the empire.