Housing prices are sliding again, and there is plenty of blame to go around. Factors include the sluggish recovery, ineffective private and public efforts to prevent foreclosures, suddenly risk-averse lenders and temporary tax credits that generated a short-lived and artificial rally in home sales. But a lawsuit filed last week provides a pointed reminder that the bubble would never have happened had it not been for irresponsible lenders and the feckless investors who kept them awash in cash.

The case pits insurer Allstate against Bank of America and Countrywide, the giant mortgage lender that Bank of America bought in 2008. The suit claims that Countrywide misrepresented the risks posed by the bundles of mortgages it sold to investors such as Allstate, which sank $700 million into the securities from 2005 to 2007. After the housing bubble burst, the mortgages in those securities started defaulting at a torrid pace, causing the value of the securities to plummet.

The complaint presents only one side of the dispute, of course. A Bank of America spokesman suggested that Allstate was “a sophisticated investor ... looking for someone to blame.” But Allstate’s examination of a sample of the mortgages in each bundle found that Countrywide’s disclosures consistently understated such important indicators as the percentage of mortgages with low down payments or with no proof of the borrower’s income (so-called liar loans). And by Allstate’s analysis, Countrywide’s disclosures were not off by a little bit. For example, in 11 securities that were supposedly free of “underwater” mortgages, up to 14 percent of the loans turned out to be larger than the value of the house.

It is true that lenders across the industry threw caution to the winds during the housing boom ― how else to explain the existence of liar loans and mortgages that went belly up as soon as housing prices turned down? But that was just part of the problem. As Bank of America observed, Allstate and other buyers of mortgage-backed securities were often sophisticated investors. Yet they do not seem to have bothered with a rigorous risk analysis until after they lost their shirts.

Instead, they relied on credit rating agencies ― which were paid by the sellers of the securities, not the buyers ― to protect them from bad investments. Given that most of the securities Allstate bought were given pristine “AAA” ratings, it is clear that the rating agencies involved also failed to do the research needed to spot the discrepancies between Countrywide’s claims and the actual risks.

The financial regulatory reform law enacted in July includes some important new protections against the heedless risk-taking of the housing bubble. Eventually, however, new bubbles will emerge in other markets and present new threats. We hope investors like Allstate will not have forgotten what happens when they pour millions of dollars into a sure thing without scrutinizing what they are buying.

(Los Angeles Times, Jan. 2)