It just kind of lay there during the Reagan and Bush 1 years, then the Clinton Administration with all their meddlesome tendencies decided it was time to "strengthen it and make it work". You can read that as Government intervention in the free market, which virtually never works out. Clinton's Attorney General Janet Reno was given marching orders to "make banks lend to people who couldn't qualify," because the additional teeth that Clinton's HUD folks put in, were largely ignored. Reno sued several banks for "racial bias" because they wouldn't loan to people with lousy credit and/or work histories, causing old bank in Delaware to go under in the beginning of the crisis.
As luck would have it, the ill conceived Graham, Leach, Blyley act happened at that time and the removal of the Glass-Steagall act allowing commercial "bankers" to own regular banks began the next tsnuami of bad lending. Essentially, because Clinton's Justice Deparment forced banks to make bad loans, the new "bankers" (who are nothing but sharks), figured out how to sell these bad loans by disguising them in tranches (packages of "mortgage backed securities" which normally had strong characteristics.
Congressional oversight was completely missing during this era. Barney Frank's lover was a high ranking officer in Fannie Mae, and Barney kept all heat off of him. Chris Dodd, in the Senate got sweetheart loans from Angelo Mozillo (chairman of Countrywide mortgage) so he didn't do his duty either. In fact, both went out of their way to discourage the attempts by the Bush II administration from doing anything about this unfolding mess.
There were many other players producing loans for people who never had a chance to pay them back in those days. One of the most aggressive and scurrilous was Penny Pritzger and her husband. Now, she's being considered for Commerce Secretary. Anyone want to guess how that will work out?
In short, Government messing around to "do good" in free markets makes an absolute disaster out of the free market, then the very Government administrators and politicians that caused it all skate free and blame the banks for doing what they told them to do, and it's especially upsetting since the politicians were completely derelict in their oversight responsibilities.
Now we have Dodd-Frank hampering the free market and causing all sorts of bad behavior as people try to avoid running afoul of the often contradictory aspects of that ridiculous piece of legislation.
GRI, CRS, ABR, CLHMS, e-Pro
The explosion in the availability of sub prime mortgages was in large part a response to rapidly rising home prices which led investors to believe that borrower credit was unimportant because the collateral would always be worth more than the loan. At the same time borrowers felt certain that they could sell or refinance if there income did not grow into the loan. The increased availability of sub prime loans help fuel even further increases in prices and when prices quit rising these vulnerable borrowers were often the first to go since the only hope they had of paying off the loan was sale or refinance. The originate to distribute model which separated ultimate lenders form originators and delegated the investment due diligence process to conflicted rating agencies served to further grease the skids.
That was step 1: underpricing sub-prime mortgages.
Step 2 was a liquidation system where the mortgages were not inspected before being bundled. This is because one genius quantitative analyst came up with a dense mathematical "proof" that maintained that the garbage in a bundle would actually be cleansed by the better loans in the bundle, or some such rot. In any event, one bundle containing over three hundred million dollars of mortgages owned by the San Francisco Federal Reserve Bank was examined (after the fact) and more than half of the contents did not meet the originator's own underwriting standards.
Step 3 was that there wasn't money to pay the holders of the bonds derived from these bundles of mortgages, and the primary insurer (AIG) had a "liquidity crisis" - they couldn't pay the insurance claims.
I disagree with my colleague from Austin; in my opinion, the problem had nothing at all to do with the CRA - as Aaron Pressman wrote for Bloomberg in 2008. The problem in fact was that government was too "hands off" and didn't actually "govern" in an arena where lack of oversight and enforcement brought the financial world to its knees.