Why did mortgage backed securities, etc. start to turn bad?
You seem to have lost the plot. The problem didn't arise because people stopped paying their mortgage- that was an unavoidable consequence of the practice of writing mortgages to people who bankers/brokers
knew would default, then bundling those "assets" with legit securities with high-grade investment ratings, then selling them off to unsuspecting investors (such as local councils in Australia). The problem arose because of the deceit involved. Is that really lost on you? You are so caught up in your dogma that you believe it was the fault of the people who believed the sales pitch of bankers/brokers- criminals- so desperate to expand their businesses that they engaged in this sham/con? Madoff is not the problem- it's the stupid people who invested with him? That's what this was- a con on a massive scale.