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The housing bubble was caused by several factors:
1) When Trea Sec Rubin destroyed the Mexican peso it sent the maquiladors to Asia and massive numbers of Mexicans (legal and illegal) to the US. These immigrants started in low paying jobs but soon had good paying jobs and bought houses. They were the natural increase in supply under the law of supply and demand.
2) Due to liar loan opportunities, realtors/mortgage brokers on commission encouraged unqualified buyers to lie on their applications and to buy houses they could not afford.
3) Speculators attended a weekend cheerleading event with Donald Trump&Co and bought properties they intended to flip.
#2 & 3 were artificial increases in demand. But they also increased demand and thus prices.

#2 & 3 had every wishful thinkers to believe that housing prices would continue to rise and they could flip for a bigger house, which in fact, many of them did. The income tax laws stated if they sold at the increased price and pocketed the profit, they had to pay tax on it. But if they “re-invested” it in a more expensive property they could avoid the taxes.

As anti-illegal rhetoric increased the constant increase in the natural growth of the market from immigrants disappeared. In most cases, the buyer was a legal immigrant. But the depended on “cousins” living in the extra bedroom, garage or basement to help with the mortgage payment. Money does not like uncertainty. It did not like the uncertainty of future immigration law.

With the natural increase in demand disappearing, the speculators were caught short (or maybe long) on their investment. They saw no reason to continue to pay on a mortgage for a house that was 50% or 60% underwater.

Even if you believe in the mission of Fannie/Freddie, parking xClinton staff who were not competent for those jobs was not a good way to achieve the Fannie/Freddie mission.

Of Course we could mention Freinds of Angelo like Chris Dodd. We could mention gamblers hoping to turn a quick buck and not get caught when the market turned. We could mention the selective bailout of friends of GoldmanSachs but not the bailout of enemies of GoldmanSachs. We could mention how the bailout was ill conceived. If one really believed in bailouts and propping everything up there was a much more logical way to do it than the way it was done. But all these also mentions did not cause the problem.

Now, how do we learn from history? And when the “next war” occurs, will we try to fight it with the tactics that should have been used on the “last war”?

Very, very good and succinct post that does a cliff notes summation of what happened. Spot on.

I was in the business at the during the bubble buildup as well as the time of the crash and saw everything you mentioned first hand.

Lenders and mortgage brokers had appraisers eating out of their hands. If the appraiser didn't play ball, he was out.

The lenders didn't give a crap, as long as the docs got by the underwriters (who were really coaches on how to push bad paper)they were good. The mortgages went off his desk and out the door the next day to whatever buyers were scooping them up.

I saw nurses and blue collar guys trying to become real estate tycoons, and they were getting loans with very little on the front end. Of course when they got caught holding the bag, they had very little to lose - except for a bad credit rating for a couple of years.

Some got "smart" by getting a second mortgage or HELOC and buying a Mercedes or something else before they walked away. It was really absurd.

I read about this one house during this time that changed "flipping" owners and mortgages numerous times. Well, after the crash, it finally wound up with a serious owner/buyer who paid cash. He went inside an found the skeleton of a dead guy, with his dead dog laying next to him. He had been there for like 2 years.

None of the buyers or financers (or APPRAISERS) over that 2 year period had bothered to actually enter the house and see that an earlier owner - and his poor dog - had died there... and rotted away.