Exactly.
In creating mortgage pools and determining risk, lenders depended on algorithms that had been accurate for 80 years:
(1) There had never been a prolonged or significant drop in national home prices since the Great Depression.
(2) Even during the worst recessions, the national mortgage default rate rarely exceeded 7%.
In 2006, the blind spot in those algorithms was that ALL the malfeasance and ALL the fraud was going on at the one-on-one level, between the individual home buyers and the mortgage brokers, so it was essentially impossible to measure the scale of this disaster before the Crash.
This created two critical problems:
(1) Prices for homes exploded upwards because millions of previously unqualified buyers were allowed to enter the market.
(2) Almost no one understood that millions of new buyers were moving into homes with no down payment, and with mortgage payments that were often equal to, or less than, the rent they had been paying. Thus, when they lost their jobs, or when the price of their new home dropped 25%, they just walked out the front door, rented a new apartment, and never looked back.
This is why home prices collapsed by 50%, and default rates reached 35%, in the worst hit areas.
It's also important to recall that the mortgage crisis was INTERNATIONAL, not just in America.
Spain, Ireland, and parts of eastern Europe had a housing collapse that was at least as bad as the USA.
You make a lot of good points.
“(2) Almost no one understood that millions of new buyers were moving into homes with no down payment, and with mortgage payments that were often equal to, or less than, the rent they had been paying”
Dubya should have known, because he was championing and promoting an incredibly foolish policy known as the American Dream Downpayment Initiative that was designed to do exactly that.
“In creating mortgage pools and determining risk, lenders depended on algorithms that had been accurate for 80 years:”
The entire industry ended up pricing risk by using David X Li’s Gaussian Copula Function which he borrowed from the life insurance field. The problem is that there was a serious flaw in using this formula for mortgages- which none of the wizards running the the lenders were aware of because they didn’t understand the complex math involved and they didn’t listen to their risk officers who warned of impending disaster.
That was only because the mortgages were interest-only Option ARMS, with no principal payments for the first two or three years. Once the interest-only period ran out and the borrower had to start paying-down the actual loan, the monthly payment doubled or tripled.