As interest rates rise, home prices fall. This is pretty obvious, and the reason I left the mortgage industry in 2004 to work at the Fed. Business was sinking, and I didn't want to drown. Now sub-prime loans are being defaulted on all over the place, mortgage companies like American Home Banc are declaring bankruptcy, and homeowners are finding their main source of equity falling in value rapidly.

Here's what happened by my initial view. Rates fell to a historical low in 1993-1994, so lots of mortgage companies formed to provide refinancing and loans for new purchases. Once most of the easy one had been taken care of, all those new loan officers needed something to do to keep their jobs, so they pushed into the sub-prime market and allowed far too much risk into the equation. Now those risky loans are coming due, and ARMs are rising, and people are defaulting.

However, I read another compelling theory that I want to do a bit research on. One blogger I read said that the push for sub-prime loans came from our economically ignorant elected officials who pushed for expansion of sub-prime lending so that the poor could get in on home-purchasing bandwagon. Great idea for a couple of years, but the consequences turn out to be far worse then the short-term gain. This fits right in with my view of many politicians and their short-sighted urge to help the poor in order to gain easy votes, but I don't know if the theory has any credence. I'm going to do some searching and see if I can find out more to support it. For now I'm sticking with my initial theory.