Actually, they did relax lending standards and bundling mortages.
It all started under Carter. That led to law suits in the late 1980s, but to keep it simple. Here goes.
When the US Government, starting under Bush 41 and moving on through Clinton and Bush 43, relaxed the lending rules the banks started to run out of money to fund all of the mortgages they were making. You can thank the authors of the useless Dodd/Frank bill for being behind many of the questionable changes that followed.
Through Fannie and Freddie the US government started the practice of bundling mortgages so the government would buy them and the banks would then have the cash on hand needed to make more loans. That idea came out of freshman Congressman Marty Meehans office in conjuction with Congressman Barney Frank around about 1993/94.
It was an idea brought up by a Bank of America official at a meeting in Lawrence Mass as part of a pilot project providing mortgages to people whos credit had been trashed by unemployment in the 1991 recession. The origional concept was a noble and well thought out plan that went bad during implimentation.
After realizing that the scope of what they had gotten into was even more than the government could afford, the bureaucrats in Fannie and Freddie pushed Clinton for help. He worked with Congress to repeal Glass/Steagall in 1999 to allow investment banks to get into the game.
The rules were so fast and loose that all semblance of good banking went out the window. Many of the lending rules were managed by the individual federal reserve banks. Some like, the NY and LA fed, went nuts and set virtually no rules. Count welfare and unemplyment payments as income? Sure. No income, no problem.
The level of regional control is why New England saw some of the least impact of the sub-prime crisis. The head of the Boston fed had kept a lid on the crazy lending among New England based banks. It pissed them off at the time, but only 1 bank under his region has failed during this mess. The damage in New England was limited to those mortgages held by the big national banks. Local banks in New England are now thriving.
