A year ago, the excessive extension of credit that led to defaults, foreclosures, home prices and more expensive mortgage money was the most talked-about story of 2007.

Everyone in the homebuying and refinancing process was complicit, including the brokers, the bankers, the securitizers on Wall Street, wide-eyed consumers, gambling investors seeking only to flip and not hold, and real estate agents.

Clearly, lenders made loans far too available, bowing to the pressure of Wall Street funds willing to securitize any instrument secured by a home. Yet homebuyers, and investors, did not use caution. While genuine buyers determine what they can afford by measuring their borrowing costs against their income, many others were blinded by the dollars signs of potential appreciation and stretched themselves to the maximum.

This year, the demise of the once-revered players who extended that credit is the story of the year. The big names have come tumbling down.

Four short years ago, when housing still was the bright light in the national economy, who would have expected the two biggest providers of mortgage money – Fannie Mae and Freddie Mac – to be pulled into government supervision? Who could have predicted that Lehman would file for bankruptcy protection after 158 years of doing business? Or that WaMu, which built its reputation on vanilla, 30-year, fixed-rate loans with a minimum of 20% downpayments, would be derailed by an Option ARM whose most desirable option had owners owing more than they originally borrowed?

What to do about all of this? The National Association of REALTORS®, the largest professional membership organization in the world with 1.2 million members, recently offered a solution. NAR presented Congress with a four-point housing stimulus plan to help stabilize the housing and mortgage markets. The crux of the package suggests using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buydown and more tax credits.

That buydown would be a one-percentage point, interest-rate buydown on fixed-rate loans for all buyers. The reduction reportedly would result in approximately 840,000 additional home sales and reduce the inventory of homes by as much as 20%. National inventories currently at a 9.9-month supply would decrease to approximately a 7.5-month supply. The buydown offer would be available for a specific time period.

What about the good Texas homeowners who lived within their means, who did not try to buy more house than they could afford, who did not take a vacation with funds from a home equity loan they could not afford to repay? Insurance companies offer lower life insurance premiums to non-smokers – individuals deemed to be lower risks for not smoking. Why not offer a lower interest rate to borrowers who have toed the line?

“In a situation like this,” says Lawrence Yun, NAR’s chief economist, “not every situation is going to be as equal or as fair as others.”

Ironically, the best rates used to be saved for borrowers with good credit who had saved enough for a 20% downpayment. (What a concept!) They got fixed-rate loans – the conventional mortgages WaMu was famous for. Then, WaMu and other lenders discovered a lot of money could be made in not-so-conventional loans. WaMu got into the subprime mortgage business full throttle in 1999 along with promoting its option ARM.

Subprime lenders got hammered for the current state of the housing market, but the original concept filled a needed niche. The traditional subprime borrower did not conform to standard credit, downpayment, income or job standards, and some lenders specialized in making those loans with higher rates and fees.

There were unfair accusations and a lot of inaccurate information about subprime mortgages. First and foremost, a subprime loan is not any loan that comes with a balloon payment. Adjustable-rate mortgages (ARMs) with balloons have been around for years and are not new. The same goes for option ARMs, yet they all have been lumped into the subprime category.

What WaMu did not do was pull back on its option ARM when loan brokers had no idea how to properly explain the potential fallout to consumers and small-time investors or were captivated by the money they could make by putting marginal borrowers in the loan. Consumers were to blame, too, betting that future appreciation would cover greedy decisions. The fallout occurred – big-time – bringing down the 119-year-old bank and several of its banking teammates.

Big names, big problems. Such was 2008.