I agree that the lending standards described in this article were outrageously irresponsible, but I also believe that they played a very small role in the collapse of the U.S. housing market.
The real problem was the whole process under which all kinds of homeowners -- even responsible ones with great credit records -- were able to buy homes using heavily leveraged financing at record low interest rates. The "natural" economic consequence for this kind of arrangement was a combination of two trends that could never be sustained over time: (1) rising home prices (since home prices are largely driven by the monthly cost of ownership, not the actual price of the home); and (2) a long-term decline in revenue for lenders from mortgages even as their interest-rate risk increased dramatically (i.e., they were holding long-term loans at very low interest rates that are likely to increase in the future).
For all the complaints about bank lending standards over the last couple of years, it's important to remember that the U.S. legal and regulatory landscape for residential mortgages is very one-sided in favor of the borrower. Just think about it. You can go out and get a 30-year fixed-rate mortgage -- and refinance it whenever you want to if prevailing interest rates go DOWN, but the bank never has the option of renegotiating the terms of the loan if rates go UP.
But didn’t the low interest rates contribute to a robust market? With high interest rates, there would have been a much slower housing market. Wouldn’t this have led to other negative economic consequences?
That's because the Bank already got their money at a fixed rate when the loan was closed. Your analogy is akin to allowing the grocer to come to your house a week after you bought a chicken and demanding an extra 50 cents a pound because that's what he paid for it 3 days after you bought it.