The loan wasn't the problem. Counting on ever-increasing housing prices was...
They can't increase forever at the rate they have in places like Cali.
Eventually, the homes price themselves out of range for people even with interest-only loans and such.
Look at any California community and you'll be shocked. Average income $40k, with an average home price of $400k. It can't go on forever. When only 2% of the entire population of a city can realistically afford a house there, something is wrong.
Even that isn't a mistake. Home prices do, have and will continue to go up with corrections along the way. Always have, always will... the price of a home in this country is cheap, in comparison to other places around the world including Central America.