The charge: Lenders relaxed underwriting standards far too much and made loans they should have known would not be repaid.
Lenders got increasingly accepting of high-risk loan applicants. They had discovered years ago that they could sell subprime loans in the secondary markets by adding stiff risk premiums to the interest rates they charged.
Even though a far higher percentage of the loans would go delinquent, the higher payments from borrowers still paying back the loans would more than offset the delinquencies.
Rising home prices enabled lenders to maintain this equation for years. Appreciation meant that even borrowers who fall behind might have already built up substantial home equity in those two years, equity they could tap to make up shortfalls.
But when home price appreciation stopped its meteoric rise, it caught up many borrowers with no more home equity to draw on.
Bottom line: Lenders made far too many loans to borrowers they knew, or should have known, would not be able to pay them back. That, probably more than any other factor, will drive an increase in foreclosures during the next year or two.