[I posted this as a comment to a recent Reed Hundt thread, but wanted to include it as a blog entry, given my strong feelings of impending doom--perhaps because, after 20+ years in the same house, I just bought a new home.]

The New York Times recently ran a front page article on increases in foreclosures, late payments, and looming problems in the subprime market. They assert that this could become a bigger problem than the S&L crisis some years back.

There are many reasons that families default on their mortgages, including job loss and illness. Still, the subprime market encourages bad behavior. For example, take an ARM. The buyer qualifies at the rate of today's payments. In three years, the payments could, of course, more than double as the loan baloons.

Add to that problem the fact that underwriters use the standards provided by the lender rather than, say, some more established national criteria. As a result, buyers can qualify for loans that will require up to 50% of their gross (I said gross, not net) income. That can work with an ARM, as well--meaning that, in a few years they will not have a prayer.

Why do lenders do this? Because they fully expect and intend to package the loans with some first class paper and sell it to bigger institutions. Why do borrowers do this? Some just don't worry about tomorrow. Some expect to pick up much better jobs or win the lottery. And many expect that real estate prices will continue to inflate and that they can resell the house if the payments get too high. In the meantime, it's a great pad, you know!

As soon as the economy turns sour, this is going to explode. Coupled with an explosion in the budget defecit (because we will have less revenue and have to pay more in interest to sell government debt), this is going to make the dot.com crash look like child's play.