In particular, the government was forcing lenders to accept more risk (viz sub-prime borrowers) than they would otherwise have done.
As I pointed out above, the number of loans made because the government said-so is not enough to account for the problems they encountered. Because of the mortgage-backed securities industry, there was incentive for banks to make sub-prime loans and offload the loans (and the risk) elsewhere. In other words, the government's requirements did not lead to the glut of sub-prime loans.
I also find your comment about lenders incorrectly modeling risk strange - it's a true statement, but I don't see how that means the market wasn't "free."
As I pointed out above, the number of loans made because the government said-so is not enough to account for the problems they encountered. Because of the mortgage-backed securities industry, there was incentive for banks to make sub-prime loans and offload the loans (and the risk) elsewhere. In other words, the government's requirements did not lead to the glut of sub-prime loans.
I also find your comment about lenders incorrectly modeling risk strange - it's a true statement, but I don't see how that means the market wasn't "free."