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Well the banks weren’t making loans to people who couldn’t afford them.

That is exactly what they were doing...on a massive scale.

Check this out (from NPR no less):

Lenders let people pay more than they could afford for homes and devised extraordinary methods of doing so: loans described as "NINJA" (no income, no job, no assets), "liar" (no-verification "stated income" loans) and "exploding" (loans where the monthly payments would "explode" after a two-year promotional rate). Subprime lending soared.

I remember at the time that there was speculation that was going on and there was also a lot of blame cast at the CRA (Community Reinvestment Act).

But to issue loans at least Fannie Mae and Freddie Mac loans without income or jobs, would have been fraud. There were still income requirements. And there were investigations and reviews but very little prosecution. Which leads me to conclude that was simply speculation.

And the CRA is still in effect. I think it's a good law that does help lower income communities. If banks can raise deposits from those areas, I have no problem with a law that requires at least some of that money to be put back into those communities. I just don't buy that those communities have sufficient deposits, but there aren't people with income, wanting mortgages on properties in the community, that would qualify. Or businesses wanting loans in those communities. And if they don't qualify then I don't think that Fannie Mae and Freddie Mac would hve approved loans.

It might be a bank enigma on how to successfully employ funds required by the CRA, but I think the banks could figure it out without resorting to fraud.

With regard to the NINJA loans, if they were 20% of the losses, they weren't the main cause, even if they contributed. And despite that there was no income verification on those loans, they were required to have a good credit rating going into them. Which means they probably had jobs and/or assets. They just got hit by the recession like everyone else.

NINJA Loan: Definition, History, Current Availability

"The proliferation of NINJA loans was a contributing factor in the 2007-2008 Financial Crisis and housing bubble. One research paper estimated that such loans accounted for $100 billion, or 20% of total losses, tallied during the crisis."