The free market failed here due to fraud, lack of transparancy and non securitized lending. CRA started the mess but the lack of controls on leverage and the ability for companies to trade without adequate reserves was the real problem.
Your jumping in in the middle of the causal chain here.
If Freddie and Fannie hadn’t effectively securitized NINJA loans, mortgage companies wouldn’t have made them and the credit rating agencies would never have rated the resulting MBSs AAA. Thus they wouldn’t have been used as reserve collateral by banks and insurance companies in the first place.
Further, those loans allowed people to buy homes who otherwise would not have been able to, thus putting upward demand pressures on the real-estate market, raising prices beyond where they would have otherwise been.
Yes, there was fraud. But not as much as you might think. Angelo Mozillo was a jerk, but he was operating within a government backed bubble with lots of other jerks (Dodd and Frank being two of the biggest).
You might be partially correct, but, in my opinion, government intervention is by far the root cause (witness whom bullied sub prime mortgages to begin with, and then relaxed the rules to artificially survive..barney frank, chris dodd and the rest of congress should have their a$$es sued off.