That's true. But the banks weren't allowed to properly evaluate the risks.
Yes. And that's fair since it is the representatives of the taxpayer who forced the banks to ignore the risks and make the loans anyway. The Community Reinvestment Act was a legislative act that forced banks to make loans despite well-known and patently obvious risks. When a bank was required to include things like unemployment payments and ignore past credit histories when deciding which loans to approve (and how much money could be loaned), then those who forced the high risk loans should be the ones responsible when they fail.
That the "community activists" (ACORN, PUSH, etc.) jumped on the CRA bandwagon to threaten banks that didn't make enough risky loans with legal action is still a side-effect of the legislative regulations that our politicians enacted. Their actions led to the collapse. Be angry at them, not the people they forced to make the loans.
I mostly agree with you, but consider the fact that the CRA really only got the ball rolling. The banks were forced to take on vastly more risk than they ever would have under normal circumstances and the pressure to do more of that was only increasing. The banks responded to increasingly frightening balance sheets and risk management warnings by investigating ways of continuing to provide ill-advised loans forced upon them by CRA and public policy without carrying the risk long terms. In other words, they needed a dumping ground for terribly risky debt. But since they couldn't force recipients of such loans to pay fair market rates (even bad loans tend toward absurd when you start talking about 25%+ interest rates), so they had to unload risky AND underpriced debt to someone. But what fool would buy up massive amounts of such debt (you know, besides the government)?
The answer came when banks began talking with large investment firms. They came up with the right packaging and labeling to get the debts into much more reasonable looking form that investors could be suckered into buying. It looked good on paper, so long as you didn't have the whole paper, and the investment companies ensured nobody did (including their own auditors, accountants, risk management officers, compliance officers, etc). Even the ratings agencies and regulators got snapshots tailored to fit the story being told. It all looked legitimate from ground level and nobody got the 30,000 foot view necessary to see the whole house of cards.
The result was magical: suddenly banks could move literally any amount of terrible mortgage debt off their books (given sufficient time) and investment firms had a hot new product to sink their investors' cash into. When banks and investment firms no longer had to remain separate for regulatory compliance, the wheels got greased that much more and it was off to the races. When the .com bubble burst and suddenly there were hordes of investors looking for the next big thing, the whole show went straight to ludicrous speed. Suddenly the banks had zero reason to care who was buying what for how much. They took a cut, the loans were off their books in months or even weeks, the investment firms got a cut, investors got an investment that was paying solid and consistent returns, the CRA pushers at HUD and other places were thrilled, and people who never would have stood a chance at buying a home (for blindingly obvious reasons) suddenly had no trouble at all buying anything they wanted and much much more.
It got to the point where the banks ran out of the "just below the cut" people HUD was pushing and so they relaxed standards even further. "Just put whatever you want on that income line, we aren't going to check, and the bigger the number you write there, the bigger the house you'll get!" Fake income still not enough? How about interest-only that'll require twenty times your annual salary in seven years? Ridiculous? Doesn't matter; not our problem. Just refinance or something before then! Don't have a job? Fuck it! Approved! Homeless crack addict escaped from two prisons and a mental hospital? Approved! And the result was skyrocketing home "values". When everyone can buy regardless of the price, the price invariably goes up (see also: higher education and government-backed loans). Skyrocketing home values means instant equity. Can't pay the insane mortgage you never should have gotten? Take out another one, or a home equity loan, or various other means of squeezing imaginary cash out of the overpriced home you never should have been allowed to buy. Second rule in government spending: more debt can help you with your debt problem! (first rule is of course to always buy two at twice the price)
It really became a self-propelled system in that the investments that looked good from ground level held out far longer than they should have because the artificial scarcity enabled massively overburdened homeowners to keep their heads above water (but only from a purely localized and isolated point of view that's devoid from big-picture reality). And that's why it worked for so long.
In the end, while there were problems along the way, there was no single nefarious actor pulling the strings behind the curtain. The CRA got the ball rolling, but its intentions and the intentions of HUD were fairly pure (if misguided and a bit silly). The banks didn't want to do this in the first place, but take away the risk and provide a seemingly endless stream of cash and you'll have a tough time finding the financial entity who won't partake. The investment firms had customers with problems; one who had tons of cash but no more .coms to invest it in and another who had an "asset" they wanted to sell. They merely connected the two and took a cut off the top. Investors merely wanted to park their money somewhere and the firms they hired to enable them to do so did just that. The people coming in to buy houses got everything they wanted and more, for a time (but no dream can last if it isn't firmly planted in reality).
So who do you blame? Everyone to some extent. The CRA is responsible for getting this journey started, but the banks did knowingly enable truly absurd purchasing activity. The home buyers knew (or should have known) that they couldn't afford half million dollar homes on $30k salaries, regardless of what anyone might have told them. Common sense, for Christ sake. The investment firms connected eager sellers with willing buyers, but they knew they were helping push good money into bad assets. Investors, regulators, and ratings agencies ought to have taken the time and effort to get the whole picture into focus considering the amount of capital flying through this great machine. In retrospect, each was willfully ignorant so long as the machine kept running.
Some economists have downplayed the role of the CRA, but none have come up with a plausible explanation for what happened that takes into account the whole history of this process from development to crash and none of them fully account for basic human nature. This was nothing more than supply and demand, stimulus and response, hubris and willful naivete. In a mostly free market, when you push the right (or wrong) buttons, the market responds. If you're pushing the wrong buttons, the market response will not be what you intended at all. That's the risk one runs when one attempts to do central planning (via public policy) in a human society. Either push the buttons very lightly and carefully or have so much control over all responses that no amount of button mashing can result in too much damage. In the latter case, all the responses will be fairly lousy as the system itself will become increasingly ill, but your decline will be relatively well managed and steady.
We, the people, via public policy, made a choice. That choice kicked off a series of events that resulted in a massive system crash. As usual, nobody wants to take responsibility for it. What else is new?