[The problems in the mortgage market are] a result of the reduced or eliminated down payment requirements in recent years. A 10-20% down payment, which was common only a decade ago, served two purposes. First, it prevented irresponsible people from buying a house because, barring an unexpected financial windfall, potential home buyers had to manage their finances responsibly and save for many years. Second, it made the cost of simply walking away from the home very high because homeowners would lose their down payment.
Megan McArdle writes today:
the low downpayments, not the adjustable interest rate or other exotica, were probably the biggest single problem in the market.
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