genejockey 

That's the basic problem - the whole thing came about because EVERYONE, at every level, assumed somebody was "in charge". "They wouldn't let you do it if it was dangerous". That goes from the homebuyers all the way up to the Fed Chairman, but let's be clear here - the farther up the chain you go, the more that person brings in a big salary based on the expectation that they WON'T do something stupid.

Until the early 2000s, homebuyers could reasonably expect that the bank writing their mortgage wouldn't let them buy 'too much house', because up till that time, banks wouldn't do that. Why? Because either the bank held the mortgage and couldn't afford to loan too much, OR they couldn't sell a mortgage that risky.

So, why did banks start writing 100% mortgages to people who couldn't afford the payments when the teaser rate ran out? Because somebody else was buying all the mortgages they could write, no questions asked.

So why did somebody buy mortgages no questions asked? Because investors were buying all the MBS's they could bundle.

So why were investors doing that? Because they had way too much money, they'd gotten burned in the dotcom bubble, and wanted something safe. That's how it started. Their money flowed into the market, causing housing prices to rise and the value of their MBS's with it, so more money followed - rising market and FOMO (Fear Of Missing Out).

And everyone assuming it was safe, because somebody MUST be making sure it wasn't all just a bubble, right?

Oops.