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"We demonstrate that a rapid expansion in the supply of mortgages driven by disintermediation explains a large fraction of recent U.S. house price appreciation and subsequent mortgage defaults. We identify the effect of shifts in the supply of mortgage credit by exploiting within-county variation across zip codes that differed in latent demand for mortgages in the mid 1990s. From 2001 to 2005, high latent demand zip codes experienced large relative decreases in denial rates, increases in mortgages originated, and increases in house price appreciation, despite the fact that these zip codes experienced significantly negative relative income and employment growth over this time period. These patterns for high latent demand zip codes were driven by a sharp relative increase in the fraction of loans sold by originators shortly after origination, a process which we refer to as "disintermediation." The increase in disintermediation-driven mortgage supply to high latent demand zip codes from 2001 to 2005 led to subsequent large increases in mortgage defaults from 2005 to 2007. Our results suggest that moral hazard on behalf of originators selling mortgages is a main culprit for the U.S. mortgage default crisis"--National Bureau of Economic Research web site

Intro -- Contents -- 1: A Scandal in Bohemia -- Part I: Busted -- 2: Debt and Destruction -- 3: Cutting Back -- 4: Levered Losses: The Theory -- 5: Explaining Unemployment -- Part II: Boil and Bubble -- 6: The Credit Expansion -- 7: Conduit to Disaster -- 8: Debt and Bubbles -- Part III: Stopping the Cycle -- 9: Save the Banks, Save the Economy? -- 10: Forgiveness -- 11: Monetary and Fiscal Policy -- 12: Sharing -- Afterword -- Acknowledgments -- Notes -- Index.

U.S. households accumulated debt at an unprecedented pace
between 2001 and 2007. In the aftermath of the housing downturn,
deleveraging by highly indebted households is the most important factor
responsible for the current economic slump. The deleveraging process has
led to sharp drops in both aggregate demand and employment. We argue
that meaningful policies aimed at facilitating debt-reduction for
under-water homeowners in the short run, and replacing non-contingent
debt with contingent-debt in the long run are essential for a robust and
sustained recovery.

Borrowing against the increase in home equity by existing homeowners was responsible for a significant fraction of the rise in US household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Instrumental variables estimation shows that homeowners extracted 25 cents for every dollar increase in home equity. Home equity–based borrowing was stronger for younger households and households with low credit scores. The evidence suggests that borrowed funds were used for real outlays. Home equity–based borrowing added $1.25 trillion in household debt from 2002 to 2008, and accounts for at least 39 percent of new defaults from 2006 to 2008. JEL: D14, R31