gdl,
I think in reality no one can point a finger at any one cause for the breakdown. There were a lot of little things, and the government encouraged all of it as home ownership was the quintessential American dream, and finally too many of those little things aligned in the wrong direction.
I'd be willing to bet that if the writers of mortgages were required to rate individual mortgages according to risk, then also required to keep a significant percentage of those mortgages at all risk levels on their books (instead of packaging them all up and selling every last one of them) then this never would have happened. As it was, they were packaged (to apparently keep the overall quality high), then they were insured, which often brought them up to AAA rating. Then they could be sold to anybody and everybody, and they were, and no one would question the risk because it was AAA.
It's very likely that the mortgage industry would have been a lot more selective in writing mortgages if they had to retain a large number of them on their books.
Even if they were not required to keep any mortgages they wrote, I'll bet the collapse wouldn't have happened if the intermingling of mortgages at all risk levels into one security were not allowed. In other words, at each end of the ratings range, only the best mortgages could be packaged and sold as AAA, and the worst could also be packaged but could only be sold with a junk rating. Treat them like we treat bonds, and let buyers select their own risk level.
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