Mortgage Meltdown - Top Ten Reason Housing Bubble Burst

President Obama has formed the Residential Mortgage-Backed Securities Working Group to get to the bottom of the mortgage meltdown and to determine if there were laws broken or fraudulent behavior that until now has not been charged.  There can be little doubt that there was plenty of fraud and undoubtedly laws were broken during the wild upswing in the housing market bubble, and then again as the CYA took place at every level during the housing bust.  While it may be appropriate for the federal government to jump in years later to try and unravel the mess, it would really seem to be election year pandering more than any real desire to get the bad guys. 

It might be more interesting to try and take an honest look at what went wrong on every level. Lets start with things that have been well reported and about which there is probably widespread agreement. 

1. Almost all leadership agreed that home ownership was a good thing, and that many families were being left out of the benefits due to race, redlining, and other inappropriate activities.  The "good guys" on both sides of the aisle determined that the answer would be legislation and pressure that would cause banks and mortgage lenders to be more accommodating and "fair" to those who had been left out.  This resulted in banks beginning to make loans that they felt were risky.
2. As lending standards dropped, the potential for fraud by borrowers and lenders became rampant.  People over reported income and under reported expenses, appraisers ginned up prices, and much of this was either encouraged or ignored by lenders for two reasons.  The agents and the lenders didn't much skin in the game, and the potential immediate financial reward was huge compared to the potential loss.  
3. Consumers rushed in to buy, to buy up, or to add on in typical goal rush fashion.  Home became the way to wealth.  This is no surprise.  It happens with stock, commodities, or any other item in limited supply when the public perceives an opportunity to make gains with low risk.
4. Financial entities discovered a new way to generate the needed capital to underwrite all this borrowing.  The new bundling of mortgages into various kinds of instruments was untested, and largely unregulated.  This was an invitation to disaster.
5. Leadership at Fannie and Freddy had no benefit to reign any of this in, and plenty of reward for helping it to accelerate.  They and other public and private agencies charged with properly evaluating the true value of these new instruments, did a horrible, and possibly fraudulent, job of estimating these values.
6. Most elected officials had no benefit from sounding alarms, creating restraints, or investigating agencies or banks.  They were making money on their own investments as were their constituents.  They would risk actually bursting the bubble by talking it down.  That would surely not have been a great way to get reelected. 

What were the elements that don't get talked about at all or that are largely under reported:

1. Massive speculation by investors and everyday folks.  As in any bubble, the longer it goes the less sophisticated the crowd that tries to take advantage.   So, in this case you had millions of homes being flipped by folks who were in way over their head.  They were joined by others who refinanced to add on to their investment vehicle to enhance its value for a future sale.
2.  Huge increase in "household formation."  This was due to reduced household size as kids moved out or roommates went solo.  But it was also due to the unprecedented number of both legal and illegal immigrants.  This increase in household formation resulted in high rents that made the purchase decision a marginally better alternative.
3. The speculation, price increases, rent increases, family formations all led builders to overbuild.
4. Unwinding this mess was unprecedented.  When the stock market or gold or oil or silver or a currency unwind after a bubble, you generally have a sector or two that are effected.  In this case the unwinding would take five years and counting and touch every part of the market world wide. 
   
   The banks, government agencies, and elected officials overreacted by making mortgages almost impossible to get.  The speculators accelerated the downward push on prices as they bailed or just left homes abandoned.  As prices collapsed and building came to an abrupt halt, the economy tanked, leaving new homeowners stranded with high mortgage payments and reduced income.  Household formations fell off a cliff as migration stopped, kids moved back in with parents, and roommates became fashionable again.
   
   The unwinding does what unwindings do.  It fed on itself.  The more prices went down in value the less the underlying financial instruments were worth, and the institutions holding them were now the ones that were underwater on their holdings.  Now it didn't matter whether lenders wanted to lend, they had no ability to lend.
   
   So.  Where do I go wrong or what did I miss?