They also caused it by encouraging banks to make loans to people who couldn't afford to pay them back, to "promote home ownership".

The actual problem wasn't really regulatory, it was that they made a change to a complex system and nobody noticed what the implications were until it was already a Problem.

What happened was, mortgages were always considered safe loans, because if the borrower defaults then you repossess the house and sell it to recover the principal. Meanwhile banks would only make loans to people with good credit, because even if you can repossess the house, doesn't mean you want the trouble. So if you looked at the past, holding mortgages was a good investment.

Then they started allowing the banks to sell the mortgages to investors and for the investors to buy insurance against defaults. Which is fine if the investors/insurers are doing their homework and buying loans that are going to be paid back, but mortgages were considered safe, so they were basically not paying attention. There was a thing where they had some bundles of mortgages rated as AAA when they shouldn't have been, but that was more of a scapegoat for the institutional investors who should have known better to blame somebody else after things started going south.

The actual cause was this: Once the banks started selling mortgages to investors, they no longer cared if the borrower would pay it back, because now that's the investor's problem -- and the investors weren't paying attention. Meanwhile as soon as the bank sells the mortgage, they have the principal back from the investor and can go loan it out again and then sell that mortgage. And while this is happening the government is encouraging it because look at all of these new home owners. So now you have the banks giving mortgages to everybody regardless of creditworthiness, and that's what really caused it.

Because doing that creates a housing bubble, as all the people who can't actually afford a house can now bid up the prices by taking out a loan they won't be able to pay back. And the housing bubble in turn invalidates the assumption that if the borrower defaults you can recover the principal by repossessing the house, because now when the bubble pops, people end up underwater on their mortgages. The value of the house crashes and is now less than the loan principal. So when those borrowers start to default, the investors holding those mortgages and the insurers insuring them were lined up to get smashed. Oops.