After seven years of hindsight, the conventional explanation for the world’s second greatest financial crisis remains the same: The private banking sector was insufficiently regulated, allowing Wall Street to engage in excessive risk-taking behavior and questionable trading practices, thus triggering the sudden burst of the housing bubble and collapse of housing prices.

This narrative is emotionally powerful and inherently appealing, featuring duplicitous money-grubbing on the one hand, and individual suffering on the other. It evokes politically convenient class divisions, pitting wealthy corporate executives against ordinary Americans being evicted from their homes.

Villains and victims do not alone offer a compelling story, however. A hero is also needed. Fulfilling this role is the federal government, stepping in just in time to prevent catastrophic collapse, and acting subsequently to punish those responsible (enter Dodd–Frank). The story also has a moral: Extensive regulatory oversight is necessary to protect Americans from a predatory financial sector.

There’s only one part missing from the story: a happy ending. Despite enormous federal intervention in the economy, America’s post-recession recovery has been one of the worst in history.

How can we account for this? Years after the crisis, mounting evidence is beginning to support an alternative explanation.

Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute and former White House Counsel to President Ronald Reagan, visited The Heritage Foundation last month to discuss his new book, “Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why it Could Happen Again.”

Wallison’s in-depth, data-driven analysis offers a very different story from the prevailing and oft-repeated narrative of corporate greed. His conclusion? The financial crisis could not have occurred if not for a series of fundamentally flawed government policies.

Wallison traces the roots of the crisis back to 1992, when the Housing and Community Development Act was signed into law. The bill enacted new “affordable housing goals” for two giant government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.

The Department of Housing and Urban Development (HUD) began requiring Fannie and Freddie to meet a certain quota of loans to low-income and moderate-income borrowers (LMI borrowers) when they purchased mortgages, which required them to devote a certain proportion of their mortgage purchases to lower-income borrowers. While at first this quota stood at 30 percent, HUD gradually raised the standards, such that by 2001, half of all the loans Fannie and Freddie acquired had to have been issued to LMI borrowers.

As HUD continued to raise the quota beyond 55 percent, it also increased certain base goals requiring the GSEs to hit a target number of borrowers qualifying as “underserved” (such as residents of minority areas). Finally, in 2004, HUD added “sub-goals” mandating that affordable housing goals credit be provided only for home purchase mortgages, as opposed to crediting both refinancings and purchases.

Collectively, the LMI quotas, expanded base goals, and additional sub-goals dramatically narrowed the scope of loans that the GSEs could purchase, making it exceedingly difficult for them to find creditworthy borrowers. As a result, Fannie and Freddie were forced to substantially reduce their underwriting standards.

Before 1992, Fannie and Freddie would buy only prime or traditional mortgages. These typically required at least a 10 percent down payment, a low debt-to-income ratio (DTI), and a solid credit history. Mortgages not meeting these standards were called “subprime” if the weakness in the loan was caused by the borrower’s credit standing, and were called “Alt-A” if the problem was the quality of the loan itself.

By 1995, they were accepting mortgages with 3 percent down payments, and by 2000 loans with no down payments. Since the GSEs’ size—by 2003 their market share was 46.3 percent—allowed them to dictate underwriting standards for lenders, loan quality deteriorated throughout the middle-class mortgage market. By 2008, half of all mortgages in the U.S.—31 million loans—were subprime or Alt-A. Of these, 76 percent were on the books of GSEs and other government-controlled institutions.

The abundance of easy credit brought in a huge influx of buyers, consequently sparking one of the largest housing bubbles in U.S. history. Home values appreciated, defaults declined, and the market appeared safe. Throughout, Fannie and Freddie downplayed their risk exposure by misrepresenting the actual number of subprime and Alt-A mortgages they’d purchased. Managers at the two GSEs have since been sued by the Securities and Exchange Commission for these actions.

The GSEs, then, not only prompted a proliferation of risky mortgages, but also knowingly instilled a false sense of security in the market.

The mistakes did not end with HUD or the GSEs; Wallison mentions how additional government action—including burdensome regulatory intervention, the bailout of Bear Stearns, and the preservation of mark-to-market accounting rules—exacerbated early problems. From start to finish, government policy was at the heart of the crisis.

Wallison’s findings sharply contradict the conventional narrative of reckless speculation, rampant greed, and government rescue. His story tells instead of a government whose actions lured the private sector into perdition and who then blamed the private sector for the collapse.

It’s imperative that policymakers comprehend the roots of the financial crisis in order to prevent a similar recurrence. In January, President Obama, through HUD, reduced the premium that the Federal Housing Administration (FHA) can charge for insuring risky mortgages. Lowering the premium will increase both the number of weak mortgages the FHA will insure and the FHA’s losses over time. This action is highly reminiscent of the policies that allowed the financial meltdown in 2008.

Safeguarding our future requires first discarding the false narrative that has dominated the public discourse in the wake of the crisis. Hidden in Plain Sight is an important step in this direction.

It’s time to get the story straight.