Frank Nothaft, chief economist, Freddie Mac, toward the end of the bubble: "I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down." Yahoo News: "The median price of a home sold last month was $210,200. That marked a 3.3 percent drop from a year ago" (and a much greater drop from the June 2005 high of $230K). Not as big a drop, of course, as Freddie Mac's stock price. It wasn't until February '07 that Freddie announced "that it would stop buying those mortgages that have 'a high likelihood of excessive payment shock and possible foreclosure,'" and that "it would limit the use of loans that don't require income verification or other documentation, and will recommend that lenders collect adequate escrow for taxes and insurance payments."

A lot of bad decisions during the bubble were made based on past performance, with the decisionmakers failing to take account of the fact that the bubble was unique--prices had never risen so far, so fast, and there was unprecedented amounts of fraud and abuse in mortgage lending, tied to incredibly relaxed underwriting standards. Failure to use foresight instead of hindsight led all sorts of seemingly shrewd investors to put their money in mortgage-backed securities, anticipating that default rates would not exceed historic levels, in part because prices would continue to rise steadily and allow any borrowers in trouble to refinance or sell at break-even or beyond.