Survey says: 60% of Americans are stupid


The Wall Street Journal

reports (subscription required) on the results of a new ING Group survey: "More than 40% of Americans believe mortgages that let borrowers buy a home with little or no money down helped contribute to the economic downturn."

That's great that 40% of Americans aren't completely stupid -- but what about the other 60%? I'm dreadfully curious as to what possible argument could be made that record lows in down payments weren't a major contributor to the housing and mortgage bust that ultimately led to the near-collapse of the financial system.

First, low down-payment requirements allowed people to buy houses they couldn't afford, with little "skin in the game." This helped drive home prices into a speculative bubble and made it perfectly rational for people to walk when their homes declined in value: When you have no equity in it, why stay?

Worse, the high loan-to-value ratios caused by down-payments of 0% and sometimes even less made banks' losses on foreclosures higher than they would be in a more conservatively-financed situation. If a home buyer puts down 20%, he "eats" the first 20% in losses on the house. These 0% down-payments left banks with massive losses in the event of a decline in real estate prices -- and that led to huge write-downs, a freeze in lending and a slowdown in consumer spending -- in other words, the economic downturn.

Anyone who says that the escalating percentage of little or no money down didn't help contribute to the economic downturn is terrifyingly ignorant -- and this crisis will repeat itself again unless people brush up on what happened.