Villains in the Mortgage Mess? Start at Wall Street. Keep Going.

Wall Street investment banks soon became crazy for loans to people with impaired credit, who could be charged more for a mortgage because of the higher chance of default. Absent any rules, including any preventing lenders from mislabeling borrowers a high risk, subprime lending standards slipped, and mortgage signings on a car hood in the driveway became a not uncommon sight.

Banks and mortgage lenders. They hardly needed persuading to get on the bandwagon. Lenders had just gone through wildly profitable 2003, when falling interest rates ignited a boom in refinancing -- and refinancing fees -- among prime borrowers. Wondering how to keep it going, lenders realized that they could expand it into the subprime market by qualifying borrowers with loans carrying a low teaser rate -- in the 8 to 9 percent range for a subprime loan -- then refinance them into another loan before unaffordable higher interest rates in the double digits kicked in. And if they could steer unsuspecting prime borrowers into subprime loans, they could even inflate the subprime market itself. So lenders paid mortgage brokers a kickback for steering borrowers into higher-priced loans.

Lenders also slashed downpayment requirements from 10 percent to 5 percent and even to zero. They quoted monthly payment figures that didn't include taxes and insurance to dupe borrowers into believing that their payments would be lower if they refinanced. If lenders didn't evaluate borrowers' credit at all, they could deem them a higher risk and charge more. Brokers and bank officers often didn't bother to tell borrowers that providing income and job verification would lower the loan's cost considerably. In fact, a majority of subprime customers -- 61 percent in 2006, by one count -- could have qualified for less expensive conventional loans.

To those who say that these folks knew what they were getting into, ask yourselves this: Would six of every 10 people knowingly pay more for a product than they had to?

In 2005 and 2006, the height of the market, most subprime loans had high prepayment penalties and deceptively low teaser rates. Borrowers were told that, before the rate increased, they could refinance into another loan, again with a teaser rate that would adjust after two or three years. Lenders made sure that the new loan would be bigger so that it could cover the fees they paid themselves, including thousands of dollars in prepayment penalty fees that borrowers weren't aware of but had to pay before they could retire the first loan and get a new one. Eventually, the new loan would be financed by another, even bigger loan, which could be approved only if the borrower's house kept appreciating, which everyone assumed would happen.

The private-label, subprime bond market grew from $18 billion in 1995 to nearly $500 billion in 2005. Wall Street sold subprime everywhere: to public and private pension funds, foreign governments and financial conglomerates, even fishing villages in the Arctic Circle.

Then the unthinkable happened: In 2006, home appreciation slowed. That slowed refinancings, which revealed that much of the appreciation had been caused by the breathless refinancings in the first place. As the higher double-digit rates that lenders must have known borrowers couldn't afford kick in, delinquencies, defaults and foreclosures are exploding. Credit Suisse predicts 6.5 million foreclosures over the next five years.

Here are the other culprits to finger in this sordid tale.

The White House. A few sounded the alarm early on. In 2000, during the final months of the Clinton administration, Treasury official Gary Gensler, while commending banks for making more prime loans to people and communities that had been underserved, noted that subprime lending had also expanded, with some troubling accompanying trends, including a worrying increase in foreclosures.

Eight months later, George W. Bush became president. The new administration paid no attention to the developing crisis. On the contrary. In 2001, the Department of Housing and Urban Development barred class-action suits on complaints about kickbacks that brokers receive to steer borrowers into pricier loans. At the same time, Bush, heralding the subprime market for opening doors to home ownership, said that it didn't need more rules. (He should have talked to his dad, who, as vice president under Ronald Reagan, saw the same mistake being made during the S&L scandal.)

The maestro. In 1994, Congress gave the Federal Reserve Board authority to write the rules for all mortgage lenders. In the past 14 years, the Fed has done next to nothing. Its most comprehensive attempt to impose order came five months ago, when it proposed a new set of rules so anemic that on some issues, such as prepayment penalties, they are worse than the status quo.

In recent months, dozens of news reporters and bloggers have blamed former Fed chairman Alan Greenspan for the mortgage mess, saying that he made money too cheap by keeping interest rates too low for too long from 2003 to 2004. "Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it sometime," Greenspan said recently. He has a point.