What did that do to the housing market?

It took a while for all the pieces to come into place. But once the tax laws changed in 1986 to allow the Wall Street mortgage-backed securities market to just explode, what you saw was the invention of subprime lending. Suddenly Wall Street banks were able to do their own thing, but they had to find their own niches. Fannie Mae and Freddie Mac already had what were known as plain vanilla loans: You want a 30-year fixed-rate mortgage, you've got great credit, you live in the suburbs.

So the Wall Street banks started looking for niches at the bottom and at the top of the food chain: at the top, what were known as jumbo loans, loans that Fannie Mae and Freddie Mac were not allowed to buy, and then they created subprime. They created a loan product with high interest rates, high fees, adjustable interest rates, all these new features that would enable them to make money lending to people who never before would have qualified for a mortgage.

And then when Bill Clinton became president he did not shut that down?

That's right. To the Clinton administration's credit, his Federal Trade Commission, among other agencies, and the other banking regulators, did pretty aggressively go after some of the worst offenders, who would not just be putting out subprime loans but really engaging in predatory lending, setting up borrowers with loans they knew they could not pay.

But you had two, or three, or -- one could keep counting -- things that the Clinton administration did that really enabled the bubble. And I think it was with the best of intentions at the time, but a lot of sort of willful naiveté about what the consequences would be.

Number one, what it did was really just encourage homeownership very aggressively. This became a central theme of Clinton's campaign for reelection in 1996, how almost every American can and should own their home. This was something that Clinton promoted out of a sense of his own political survival. You had Newt Gingrich and his Congress trying to eliminate HUD entirely. Homeownership was this apple pie issue that could help justify the agency's existence.

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Homeownership also became a way that Clinton pushed for a hotter economy. And what would happen as well, of course, is that he had Alan Greenspan as head of the Federal Reserve, willfully ignoring pleas that came as early as the early '90s from consumer advocates who started to see the damage being wrought by predatory lending. They were hearing from Congress in '93 legislation that passed that was supposed to stop predatory lending but couldn't because of the way the industry was growing and metastasizing too fast.

That law, the Homeowner or Equity Protection Act (or HOEPA), asked the Federal Reserve to set guidelines. Congress said to the Federal Reserve, "We want you to regulate the subprime industry, you're the only entity that can do this." And the Federal Reserve never acted on it. Once consumer advocates tried to go to court to fight predatory lenders through lawsuits, judges -- often Republican-appointed judges -- would say, "You know, I'd love to rule in favor of you, but the Federal Reserve was supposed to help define this question of law that's central to your case, and they never did, so we really can't rule that this was a violation of HOEPA."

So that was really the problem in the '90s: that Alan Greenspan and his absolutist free-market approach to the mortgage markets, and the financial markets more broadly, completely defined everything that went on.

You also had community organizers and activists pushing Bill Clinton or pushing the Democratic Party to make housing more available, right?

The calamity that came to happen was enabled by this explosive growth that sucked all the customers from the government-sponsored market into the private one where they just became sitting ducks for every toxic product imaginable. Remember that the loans that went bad were people who had bought their homes, often with the help of the government programs, then refinancing with a subprime loan or with an adjustable rate loan.

There are clearly two competing narratives. You have the right-wing critique that blames the homeowners and you have the other side largely placing the blame on Wall Street. What responsibility do homeowners actually bear for the state we're in now?

I think homeowners bear a lot of responsibility for their own wishful thinking. What you have is essentially a mass social mania. And it was infectious -- you have a homeowner seeing their neighbor moving up to a bigger, better house because their broker is offering them a loan. Yes, the interest rate will adjust, but they can refinance in two years when it does. People wanted to believe. I traveled across the country for this book and interviewed many many, many homeowners and people who sold them mortgages and homes. And Americans' capacity in general for delusional thinking, wishful thinking, fantastic thinking really just flourished.

This isn't to say every homeowner was in this position. There was no shortage of horrifically exploitative practices, lenders who preyed and continued to prey on people's financial desperation. This is all happening at a time when real wages are stagnant or declining, where people's other expenses are going up. Trying to maintain a good standard of living and finding what seems like an easy way to do it. So it just became the new normal.

The book has a great number of anecdotal illustrations about the development of the market and the damage wrought. Let’s talk about a specific case: a homeowner named Charity Stewart.

Charity Stewart had bought a house for about $100,000 in 2004 because it was cheaper than renting. She was a single mom, single grandmother, and was 33 years old when she bought the home. She said she was driving around a neighborhood, saw a sign, said there was no money down -- actually I think it was $500 down. She was able to get into that home for less, she told me, than it would be to put down a rent deposit.

When you rent a place, often a landlord will want to check out your finances, make sure they can get paid every month. Well, her lender, which was Argent Mortgage, now defunct, a spinoff from Ameriquest Mortgage, they asked for financial documentation -- and she was allowed to count income that really shouldn't have been counted. You know, her mom was on SSI and didn't live with her but they added her mom's income to her household income. So she ended up qualifying for a mortgage at a high interest rate that was much higher than she could pay for.

But it wasn't only that that really struck me about Charity's story because that has, I think, become very ordinary in the past couple of years. It was also that Charity had really no idea of what was involved in homeownership and no one had bothered to tell her. And so when the house, as often happens with these older city homes that were getting sold to first-time home-buyers, had some problems -- it had a leak. And she didn't know what to do. She had always lived as a tenant and could call the super or the landlord. And she actually tried to call Ameriquest when the leak started to get it fixed -- she didn't know what else to do and nobody told her. So by the time I came, which was about a year later, this leak had turned into this waterfall down the side of her living room and she stopped making mortgage payments, sort of in protest of her house falling apart. And she went into foreclosure that week that I visited her. 

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