There is an interesting study out by Michael LaCour-Little from CSU-Fullerton looking at the housing market. It is generally assumed that the wave of foreclosures and housing troubles we are facing today stem from high priced homes purchased at the height of the bubble in 2005 and 2006, and from the pervasive mortgage-backed securities that became popular between 2002 and 2007. However, this study suggests that many of the nation's foreclosures could actually be rooted in homeowners being too cavalier in using their homes as ATMs.
Looking at a sample set of 4,000 foreclosures in the SoCal area that occurred between 2006 and 2008, the study asks "Are capital losses resulting from purchase at the top of the market in 2005-2006 or incremental borrowing relatively more important in explaining negative equity?"
The findings show many of the foreclosed homes were bought in the 1990s and the average purchase date from the sample set was 2002, at the leading edge of the bubble, and unrelated to MBSes. During the bubble period, as home values rose, homeowners took more and more second and third mortgages on their homes, borrowing $2 billion, roughly 8 times as much as the value of the homes collectively. It was these borrowers who were really the ones hammered at the end, those who took a risk with their home but didn't pay enough attention to housing price trends and unfortunately thought prices would never come down.
The paper concludes:
While capital losses resulting from the house prices declines that began, in most cases, in 2006 contributed to incidence of negative equity, excessive borrowing was clearly an equally important contributory factor. In addition, while house price declines were important in explaining the incidence of negative equity, its magnitude was strongly influenced by increased debt usage. Hence, borrower behavior, rather than housing market forces, seems to be the predominant factor affecting outcomes.
Read the whole study paper here.