Did people magically get their mortgages reduced because of the fraud? If not, then it doesn't matter why the prices were the way they were.

Many did, yes. I personally know a couple people who had their mortgages recalculated to be more in line with the corrected values. It was all over the news at the time.

But by that point more people stopped paying completely and got foreclosed, or declared bankruptcy.

My point is that it’s logically inconsistent to say on one hand, the banks are to blame, it was all fraud, it was a fraudulent bubble caused by greedy banks, etc — and on the other hand say, look at all this wealth that was destroyed, because the wealth itself was caused by the bubble.

To clarify, I’m talking about “wealth” that is equity caused by home value appreciation, not caused by paying a lot into the mortgage. Remember that most of the distressed assets were subprime (0-down, no doc, etc) loans — the sales pitch at the time was, put nothing down, and in a year your homes appreciation will make it like you put 20% down. The gains that analyses like the link above count as “wealth” were all smoke an mirrors.