Everybody now knows that the hedge fund at the center of the Goldman Sachs SEC complaint, Paulson & Co., made a fortune by selecting credit default obligations made up of high risk mortgages. What is less well known is how Paulson picked mortgages. The Wall Street Journal reports: “According to the SEC complaint, [Paulson and Company head John] Paulson especially wanted to find risky subprime adjustable rate mortgages that had been given to borrowers in California, Arizona, Florida, and Nevada—states with big spikes in home prices that he reckoned would crash.”

What do these states have in common? Heritage fellow Ron Utt notes:

Not surprisingly, one key reason for escalating home prices in these four states was their tight regulation of land use, which created artificial shortages of developable land at a time when sales were soaring and credit plentiful. … According to RealtyTrac, by 2008 nine of the 10 areas with the highest foreclosure rates were in California, Nevada, Arizona, and Florida, while 18 of the top 20 were in urban areas that Brookings includes in its most restrictive category, including California, Nevada, Arizona, and Florida.

By early 2010, foreclosure and delinquency rates compiled and reported by Lender Processing Services revealed that mortgages in Florida, Nevada, and Arizona were the worst three performers in the country and that California was the fifth worst. Nearly a quarter of the residential mortgages in Florida and Nevada were “non-current”as of early 2010.

But don’t worry, President Barack Obama has decided to re inflate the bubble in these five states with $1.5 billion in bailouts for delinquent borrowers. Worse Obama administration Transportation Secretary Roy LaHood wants to create new bubble zones:

Other pending legislation and policies—notably the draft of the transportation reauthorization bill and the many statements by Transportation Secretary Ray LaHood on the need for greater housing and population densities—will make things worse by pursuing counterproductive policies endorsed by the President’s environmental supporters. As recent Heritage Foundation reports have revealed, both the legislation and the proposed policies have as one of their chief purposes the encouragement of the type of land use regulations that led to the house price inflation in the four states whose mortgages Paulson targeted for opportunity based on potential failure.