The unprecedented surge in mortgage defaults was the first signal of the recent crisis that spanned all credit markets including most structured financial products. This article evaluates the relative importance of borrower and loan characteristics at origination in explaining the probability of a borrower’s decision to default as compared to dynamic factors such as the changes in housing prices over time. Our analysis uses econometric models of default and prepayments and loan level data for over three million mortgage loans. We also estimate the percentage of subprime borrowers who were underwater and examine the impact of changes in home equity and potential errors in appraisal values, a key underwriting metric, on the default behavior of subprime loans during the crisis.