Here is an interesting paper from the Federal Reserve about mortgage defaults. Chris Mayer from Columbia is the lead author. Chris is one of the smartest experts on the housing crisis. He's top notch.

The paper hopes to answer the simple but critical question: what caused the recent increase in mortgage defaults?

Interestingly, they conclude that the proliferation in new types of mortgages were not the problem (though they concede that it might become a problem in the future). They further analyze the incentives in loan origination, wherein the mortgage broker doesn't bear the consequences from a default down the road, and the originating lender securitizes the mortgage so is also far removed from the eventual default. They also analyze reduced lending standards (lower down payments and less documentation of income and assets). Finally they study macroeconomic changes such as mortgage rates and interest rate fluctuations, unemployment and declining house prices.

The bottom line: it was primarily declining home prices and lower down payments that caused defaults, not all of the other stuff.

They write:

"Slackened underwriting standards—manifested most dramatically by lenders allowing borrowers to forego down payments entirely—combined with stagnant to falling house prices in many parts of the country appear to be the most immediate contributors to the rise in mortgage defaults. The surge in early payment defaults and the rise in the share of mortgages with low or no documentation suggest that underwriting also deteriorated along other dimensions. Because down payments were so small, when house prices declined, many borrowers had little or no equity in their properties and thus less incentive to repay their mortgages... Unorthodox mortgage features such as rate resets, prepayment penalties, or negative amortization provisions do not appear to be significant contributors to date to the defaults because borrowers who experienced problems with these provisions could refinance into other mortgages. However, as markets realized the extent of the poor underwriting and house prices began to fall, refinancing opportunities became more limited. ...

Our conclusions run counter to the popular perception that unorthodox mortgage features are responsible for the surge in defaults. At first glance, the fact that the most common subprime mortgage was a confusing and complicated product—a short-term hybrid with a prepayment penalty—and that delinquency rates were highest on these products suggest that the mortgage type itself must be to blame. We suggest instead that default rates were highest on these products because they were originated to the borrowers with the lowest credit scores and highest loan-to-value ratios..."

Rise in Mortgage Defaults