It is common sense. You give loans to risky people, fully aware they are risky and fully aware their other documents (income, etc.) are not verified. You give loan amounts to people that is not in line with their income. And interest rates can go up making these loans even less affordable to the people. With house values sky high, the prices can only come down. What do you expect? Bundling and selling them to wall street does not make them a safe and sound investment. They continue to be junk investments in the hands of someone else and we all know in our economy, when wall street catches a cold, the whole world sneezes and coughs and suffers.
To add to this, the government wants to intervene. Sometimes, leaving things to take its own course will be better than trying to do something. People who made stupid choices need to pay the price for it. Not the general public through their tax money.
Here is an interesting take on who is to be blamed:
" At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment. ...
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces."
It is an interesting take and sounds plausible. Government fiddling with the operational guidelines and risk management principles of the bank in the name of 'doing good for the people' - so familiar.