While politicians, talking heads, and bloggers blab about the causes of the mortgage crisis, Stan Liebowitz of the University of Texas lays out why they’re all dead wrong in today’s Wall Street Journal.

Rather than subprime or lair loans being the culprits, Mr. Liebowitz illustrates that zero equity lead to the mortgage meltdown.

The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began — the third quarter of 2006 — during which more than 4.3 million homes went into foreclosure.)

And the policy implications from his research are huge.  As Obama and our favorite asshat, Barney Frank, feebly attempt to stop the bleeding, Mr. Liebowitz says the current policy approach is vastly misguided.  And why the Federal Housing Financing Agency’s new plan to allow Fannie and Freddie to accept refinancing with 125 loan-to-value ratios simply won’t cut the mustard.

Although the government is throwing money — almost $2 trillion and counting — at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted. While Federal Reserve actions have succeeded in reducing mortgage interest rates, low interest rates induce refinancings more than they do home purchases…

…Other government policies are likely to be even less effective in reducing foreclosures. The Obama administration’s “Making Homes Affordable” plan focuses on having the government help lower obligation ratios (the share of income devoted to house payments) down to 31% from levels somewhat above 38%. But my analysis finds that mortgages having such obligation ratios at closing did not later experience high foreclosure rates. This suggests that reducing these ratios is not likely to significantly improve the foreclosure problem.

So what’s the solution, you ask, other than abdicated Barney from his thrown?  It’s not stricter regulation on subprime lenders but rather stronger underwriting standards and higher down payments.

If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.

Hopefully, our elected officials will heed Mr. Liebowitz’s warnings.  But we aren’t counting on it.