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I've not heard this reason given for contributing to the mortgage crunch, but it certainly seemed to contribute, in my view:
Once upon a time in America, your credit card interest was tax deductible. The Tax Reform Act of 1986 eliminated this option. This is, in large part, what led to people taking out home equity loans in mass quantities as their home values rose dramatically in the early to mid 90's. It was pushed as a smart financial decision.. use that home equity to pay off those credit cards and THEN your interest is tax deductible! This is where I've seen a lot of people get into trouble. You roll those credit card balances into a home equity loan or a new mortgage and KEEP USING THOSE CREDIT CARDS. Then your home value drops and BAM. You owe more on your house than you can pay and you have a boatload of credit card debt to boot. Most I know have worked their way out of it, but it's getting tougher and tougher now.
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