Why did the housing market colapse?

Q: "Why did the housing market collapse?"

I was on Yahoo! Answers when I saw this question and started to answer it, but I decided to make it into a blog entry instead.

I have a unique insider's perspective on my ability to answer this question because I've worked within the secondary mortgage market industry as a professional document custodian since 1992. What happens to your loan after the investment banks buy it? Well, its separated into two distinct file folders and each part sits in one of many loan vaults across the country. And that's how I make my bread and butter. I am a caretaker of that part of your loan file with the note, among other documents, inside.

A: The housing market collapsed because the secondary mortgage market got greedy and took on too much risk buying overvalued sub-prime mortgage loans. When those borrower's defaulted, the property values fell and borrowers who got their mortgages at the height of the market or those who used their homes as if they were ATM's and took out all of the equity became 'underwater' owing more than their property was worth and couldn't refinance. Credit became unavailable to make more loans for those homeowners because there was no equity left and if they lost their jobs in the process, due to the trickle-down economy, they lost their homes, too, continuing to drive down prices the housing market.

Since a home is probably the biggest single purchase anyone makes in their lifetime, many goods and services are tied to this asset. And if people can't buy or maintain this asset, people who have jobs associated to the housing market get laid off. We go into an economic recession and that's where we are now.