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Blame for the current financial and economic crisis can be laid at many doorsteps, but the abandonment of rational lending standards in a concerted push to make the American dream of homeownership more accessible tops many observers’ lists of what went wrong.

While the blame game has become highly politicized in the run-up to next month’s presidential election, experts of varying backgrounds said that a laudable goal of increasing home ownership spiraled out of control. Amid the wreckage, few were blameless, they said, including the government, lenders and consumers.

What really happened is that somebody let the lenders lend too much, said Phil Feigin, an attorney and former Colorado securities commissioner. People should want to live in homes, to live in nicer neighborhoods, to send their children to better schools, but it just isn’t realistic for everyone. We made it easier for them to do it. We encouraged people for social reasons to allow that. That started the whole ball rolling.

Subprime-mortgage surge

Increasing homeownership rates has been a goal of Democrat and Republican administrations as a way to stabilize struggling neighborhoods, reduce crime and address a fairness issue for minorities. Observers said the goal can still be pursued prudently without taking excessive risks.

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The rate of homeownership in the United States climbed from about 64 percent in 1995 to 69 percent in 2007, in large part due to the government’s push to promote homeownership among low-income households, according to an analysis by University of Colorado real-estate professor Tom Thibodeau. Accompanying that increase was an erosion in decades-old lending standards that had reduced bank risk and the dramatic growth of the subprime mortgage sector.

The subprime market took off during the past decade as new variations of high-rate home loans were extended to borrowers with poor credit history. A sustained rise in home values led many homeowners to believe real estate would not fall, giving them a false sense that home equity would grow automatically and provide a cushion in hard times.

Investor confidence in securities backed by those mortgages, which had been deemed low-risk by ratings agencies, began to falter in early 2007 as home appreciation stalled and foreclosure rates rose.

Commercial and investment banks that had funded the loans and held billions of dollars worth of the securities began taking losses. The malaise spread to higher-grade home loans, as well as to related financial instruments such as credit-default swaps, which insure banks against losses from mortgage-backed securities and other debt.

The final phase took hold this year, as mounting losses caused highly leveraged investment banks to teeter, and in some cases, fall. Credit markets seized up as lenders began hoarding cash to protect their own capital positions.

This week, Congress approved a contentious $700 billion rescue plan to buy many of the toxic mortgage securities and other troubled assets from banks.

The push to increase homeownership was just one of many factors that led to the credit crisis and collapse of major financial institutions.

Other key contributors to the mess included the loosening of important restraints on financial institutions, including investment banks’ leverage limits; leaving new financial instruments largely unregulated; low interest rates from 2001 to 2003 that supercharged the real estate market; the mushrooming of predatory lending and appraisal fraud; and short-sellers who bet on a stock losing value piling on weakened banks, helping to turn the crisis into a rout.

Debt-to-asset ratio exemption

Several regulatory changes frequently are cited as adding to the crisis, although there is considerable disagreement over the contribution of some of them.

Deregulation of the banking industry starting in the 1980s allowed banks to sell their loans, creating a new market for mortgage-backed securities, and to offer homebuyers variable interest rates, stimulating capital investment and consumer demand.

In 1999, Congress passed the Financial Services Modernization Act, which partially repealed the Glass- Steagall Act of 1933 by allowing commercial banks to operate investment-banking arms. Critics of the repeal say it made banks too big and clumsy, and less able to manage risk; others point out that megabanks such as Citigroup weathered the crisis better than independent investment banks.

In 2000, Congress passed the Commodities Futures Modernization Act, which deregulated the market for credit-default swaps. The government bailed out insurance giant AIG last month with an $85 billion loan in part because of its massive exposure to credit-default swap risk.

In 2004, the Securities and Exchange Commission made what many observers believe was the single-biggest regulatory mistake leading to the crisis. The commission exempted the largest investment banks from leverage constraints that limited their debt-to-asset ratios to about 15-to-1. When Bear Stearns collapsed in March, it had a debt-to-asset ratio of 33-to-1.

The SEC rulemaking in 2004 that permitted the investment banks to reduce their capital was a true travesty and folly, said Lynn Turner, chief accountant at the SEC from 1998 to 2001.

Lack of transparency

Turner also blames the crisis on a lack of transparency enabled by banks’ ability to hold risky assets off their balance sheets and on unscrupulous actions by mortgage lenders.

The industry pushed a dizzying array of mortgage products, including adjustable-rate loans with low teaser rates, loans without down payments, interest-only loans, loans that added to the principal amount owed and loans issued without proof of income or assets. These mortgages were often approved for borrowers with poor credit records.

It was their job. to make sure they were making loans that had a high chance of repayment, Turner said. Unfortunately, because they could make a lot of money doing these loans and then could sell them off and have no risk, they lined their pockets at the expense of the American public.

Those in the lending industry, as well as others, see it differently. They blame the government for failing to sufficiently regulate Fannie Mae and Freddie Mac, the federally sponsored mortgage lenders that were taken over in July in a potentially $200 billion bailout.

Under political pressure to make home loans easier to obtain, Fannie and Freddie let down the standards of the loans they made and bought subprime loans from private lenders, said Mike Rosser, a 43-year veteran of the mortgage-banking and insurance industries and co-chairman of the Colorado Foreclosure Prevention Task Force.

Private lenders followed Fannie’s and Freddie’s lead, he said.

Word gets around. If Fannie Mae is doing it, it must be all right, he said. They pushed very strongly on these affordable-housing goals.

Mohammed Akacem, an economics professor at Metropolitan State College of Denver, said blame is shared equally among the government, lenders and borrowers.

In trying to spread the chances for the American dream across society, we may have taken our eyes off the ball, he said. Banks were willing to make the loans. and people bought a lot more house than they could afford.