There are two separate but related sides to the mortgage issue. The first was what you're referring to- the loosening of standards around lending to increase home ownership. Since the 1980s there has been a huge push in the US to make sure everybody could buy a home, even if they couldn't necessarily afford one. On this issue everybody involved is at fault- Congress, regulators, banks, mortgage brokers, real estate agents (who were in bed with the mortgage companies), and of course the good old people of this country.
The other side, which is more Wall Street related, was the whole practice of the collateralization of these mortgages into mortgage backed securities so that investors could bet on the housing market. The crux of the problem here is not that mortgages were stripped apart, combined together into products and sold around, but that the ratings on these securities did not truly reflect the risk that was being taken. Investors should be allowed to take whatever risks they want to take, but the security needs to be appropriately priced for the risk that you're taking. The way pricing occurs in this market is through the rating agencies. During the period of 2005-2007 the influx of AAA rated (that's the top rating for the uninitiated) MBS was phenomenal. Some of this was the eagerness of the rating agencies to continue to bring in revenue, and some of this was the creativeness of the banks to structure the deals so that even a basket of mortgages with a lot of underlying risk (e.g. subprime) could be structured in a way so that it had a large portion that was AAA. So we've ended up in a situation where the owners of these securities are sitting on paper that should have been rated much lower than it originally was- and so you have a mismatch between price and risk.
Most of the general public understands the first part and has a lot of visibility to it, but it is the second piece of the puzzle which is wreaking havoc through corporate America. MBS are reliant on homeowners to pay down their mortgages on a timely basis- as economy-wide defaults go up the value of these securities goes down, even if the mortgages that make up any one particular security are all still timely. As the value of these securities goes down, the holders of these securities have to write down the carrying value of their holdings, essentially taking a loss even if they are still getting paid timely. Since banks and brokerage firms own such large quantities of these securities, their balance sheets are being severely stretched because these assets are essentially illiquid (even if they are still timely and have large value) because nobody wants to buy them.
For a really good idea of how all of this started, I highly recommend reading "Liars Poker" by Michael Lewis (same guy who wrote Moneyball). He wrote about this exact issue in the 1980s, and it's amazing how relevant the book still is today.
