> To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation.
I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on.
Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk.
The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent.
If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.