Who’s to Blame for the Housing Market Crash?

In a new article on the Wall Street Journal the Mortgage Bankers Association suggests that zero money down loans, not subprime loans, led to the recent mortgage meltdown. Their research found that negative equity was the number one cause of foreclosures during the first half of 2008, and that down payments of under 3% were also a significant contributing factor. Check out their chart below.

The article then goes on to claim that the myths about subprime loans are delaying any efforts by the government to improve the dragging economy. I’ve included a clip of their article below, but be sure to check out the full text at WSJ.com.

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.

This common narrative also appears to be wrong, a conclusion that is based on my analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc. It is the largest loan-level data source available, covering more than 30 million mortgages.