Economist Christopher Foote of the Boston Fed, who debunked the Freakonomics abortion-cut-crime theory in late 2005 by pointing out that Steven D. Levitt's results stemmed from a couple of dumb mistakes in his programming, and two colleagues have a paper arguing against the mortgage meltdown being, in the words of the Oscar-winning documentary, an Inside Job (or, at least, of misaligned incentives):
Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen
This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Foote et al presents 12 "myths" about the mortgage meltdown that don't hold up to scrutiny. While I find this to be an excellent framework for thinking about causes of the mortgage disaster, personally, I find some of them do hold up to the evidence presented.
For a concrete example, consider the size of required downpayments. Morgenson and Rosner (2011) write that because of the Clinton Administration’s emphasis on homeownership:
[I]n just a few short years, all of the venerable rules governing the relationship between borrower and lender went out the window, starting with the elimination of the requirements that a borrower put down a substantial amount of cash in a property (Morgenson and Rosner 2011, p. 3).
It is true that large downpayments were once required to purchase homes in the United States. It is also true that the federal government was instrumental in reducing required downpayments in an effort to expand homeownership. The problem for the bad government theory is that the timing of government involvement is almost exactly 50 years off. The key event was the Servicemen’s Readjustment Act of 1944, better known as the GI Bill, in which the federal government promised to take a first-loss position equal to 50 percent of the mortgage balance, up to $2,000, on mortgages originated to returning veterans. The limits on the Veteran’s Administration (VA) loans were subsequently and repeatedly raised, while similar guarantees were later added to loans originated through the Federal Housing Administration (FHA).
Okay, but here's the graph they use to document this assertion, showing Loan to Value percentages in Massachusetts over the years. Notice anything?
Yes, the aqua LTV 100 (i.e., zero down or even cash back) spiked from about 8 percent in 2002 to 24 percent in 2006 at the peak of the bubble.
Here's a graph from USA Today that I found at Dr. Housing Bubble, showing California's spike in zero down home-buying:
The First-Time Buyers (41% in 2006) are especially important because that's mostly where new demand comes from, and incremental demand is much of what drives up prices.
In general, Foote et al frequently argue that because various policies or conditions existed well before the crisis, such as less than 20% downpayments, than loosening downpayments didn't contribute much to the bubble and bust. But, that's overlooking the famous Boiling Frog problem: turning up the heat gradually might not cause a noticeable problem for the frogs in the pot for awhile, but eventually it does.
Moreover, in the case of lower and lower downpayments, there appears to have been a phase shift when requirements hit zero down. A 3.5% downpayment required for a VA or FHA loan scares off the riff-raff and conmen, plus the government regulations lessened fraud in appraisals and the like. But the zero down loans that George W. Bush greenlighted to federal regulators in his October 15, 2002 speech at the White House Conference on Increasing Minority Homeownership were a not insignificant cause of the Bubble.
Still, I would agree with Foote that Tulip Mania-style overoptimism is a big part of the explanation. But where did this over-optimism come from?
I woud argue that a host of evidence, such as the biggest appreciation and biggest losses happening in the four Sand States of California, Nevada, Arizona, and Florida, that "diversity" played a huge role, especially in the ban on critical thinking about diversity that has been inculcated in the U.S. An immigration bubble preceded and then egged on a housing bubble, and nobody was supposed to say anything bad about it, especially not in internal company documents that could get your firm in trouble for a discrimination lawsuit.