Bloomberg looks at the exposure banks have to risky financing. "Every time the subject of banks making risky home loans to bad credit risks, no money down, no questions asked, the usual retort is that banks sell the mortgages. That's not exactly true. Mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent."

"If enough of these loans go bad, as they did in the late 1980s and early 1990s, it could impair the banking system's ability to extend credit, with all that implies for the economy. If history is any guide, if this time isn't different, when the banking system is broken, the economy doesn't work."

" In the 1980s housing boom, the villain was speculative building. After the bust, regulators clipped builders' wings. This time around, it's been speculative buyers who have provided the tailwind to the housing boom. 'We've outsourced the speculation,' says economist Michael Carliner of the National Association of Home Builders in Washington. 'The non-owner-occupied share of mortgages has been rising since the mid 1990s.'"

"When prices stop appreciating, the speculative tailwind behind the housing market will abate. At that point, the true measure of outright speculation versus good old-fashioned home ownership should become apparent. The Office of the Comptroller of the Currency, the Fed and the other financial regulatory agencies issued 'guidance' on 'non-traditional mortgage products.'"

"It would certainly be a first if regulators got into the act before any fallout occurred."

"Delinquency rates have started to rise. Instead of cutting back on the exotic mortgages they've leaned on throughout the boom, many lenders are charging ahead on such high-risk loans full tilt. 'Mortgage lending standards show little sign of tightening,' says Frederick Cannon, bank analyst. '[Lenders] should have dialed back the aggressive loans by now.'"

"The much-feared troubles may finally be arriving. Delinquency rates jumped more than 7%, to 4.7% in the fourth quarter of 2005. Home buyers are becoming over-extended. In California, where seven of the 10 most expensive U.S. cities are located, one in five buyers already spends more than half of pretax household income on housing."

"It has happened before. In the mid-'90s some banks were so desperate to issue mortgages that they were lending as much as 125% of a home's appraised value. When the economy weakened, several filed for Chapter 11 bankruptcy."

"Rhonda is in a panic. The two-year introductory rate on her adjustable mortgage is about to expire and send her payments soaring. She thought she could refinance to a more-affordable loan, but the rates she's being quoted are just as high."

"'So I then decided I would just sell the house and get out of it,' Rhonda wrote. 'WRONG! The houses in my area are selling for around $20,000 less than what I owe!'"

"Nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005. The study of 26 million homes in 36 states and the District of Columbia found that one in 20 home borrowers was upside-down by 10% or more. The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more."

"Homeowners with no equity and adjustable-rate mortgages face additional risks from the loans themselves, since their payments could rise 50% or more in coming years as interest rates reset to higher levels."