David Lereah, the chief economist for the National Association of Realtors (NAR) has weighed in on the bankruptcies, foreclosures, and predicted Armageddon in the subprime mortgage market.

In a column on the NAR website titled "The Subprime Mess" Lereah gives his take on what has happened and what might. Much of it is a recounting of the familiar history leading up to the current tumult, but he does have an interesting take on the psychology behind the mess.

"Just as children in an orderly classroom stir up a wild ruckus when the teacher leaves the room," he says, "some people and businesses stray from fundamental behavior during a frenzied market environment." He cites the savings and loan crisis of the 1980s when S&Ls were purchasing pricy art while the bank was floundering and the all too familiar behavior of investors during the dot.com boom when fundamental investment principles were viewed as tools for sissies. The subprime mess, he maintains, is just another example of typical human behavior in a frenzied environment.

So, according to this theory the current mess was either inevitable or should have been foreseen and stopped in its tracks. The looming danger hardly went unnoticed; many people were warning about the risks two and three years ago but they were, in general people and organizations who did not have the means, power, or connections to do anything about it. Maybe, therefore, it was inevitable.

In any case it is now water under the bridge.

So where does Lereah see us going from here? First of all, he disagrees with the media and their doomsday prognosis about the crisis which needs to be weighed against his reputation as a cheerleader for the housing industry. Still, he again has some interesting ideas about the future.

He says we should expect a drop-off of subprime originations through 2008 which may mean that half of high risk borrowers will fail to secure loans. This, if it happens, will depress home sales. What he sees is more likely, however, is that these buyers will be serviced by a newly revitalized FHA and from lenders stepping into the breech to make loans meeting Freddie and Fannie standards and offering "fair and affordable mortgage options to subprime borrowers." He, like The Mortgage Bankers Association, the National Association of Mortgage Brokers and other advocacy groups have warned again overkill by regulators and Lereah does so as well, asking for responsible lending practices as opposed to practices that cause a credit crunch.

He warns we should expect that 10 to 25 percent of households that fit the subprime profile will be unable to secure a mortgage under today's stricter lending standards but that "many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so... So the long-term health of the housing market will probably stay in tact (sic)." In the short term Lereah expects that home sales will fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices.

He quotes, as did we several weeks ago, First American CoreLogic estimates that about 1.1 million of the 8 million adjustable rate loans originated over the last three years are likely to end up in foreclosure. He predicts that most lenders will attempt to work out problem loans before they become critical by refinancing borrowers into other mortgages and that disproportionate numbers of the foreclosures that do occur will do so in high cost areas such as California but views this as relatively good news as those more or less healthy local economies will present fertile ground for lenders to sell the foreclosed properties in a reasonable amount of time. "Foreclosures will create temporary inventory problems, but inventories will be eventually worked out."

Although this presents a fairly optimistic picture of what is to come (depending on your perspective as a lender, a real estate agent, or a hapless homeowner) Lereah does add a disquieting note. He expects that today's subprime problems are likely to spill over into the housing sector and the economy in a number of ways. He projects that, if lenders exercised poor underwriting in the subprime market, it is likely that these practices were also used for their Alt A loans (the medium credit range of lending about which little had been said in the current climate) and possibly even into prime mortgage lending as well. This could mean that delinquencies and foreclosures in these markets will also become a factor.

In addition, he fears that the tightening of underwriting standards in the subprime market may lead cautions lenders to tighten their approach to borrowers in the prime market as well, keeping some households from purchasing homes even though they are well able to afford them. And, the media comes in for a piece of the blame. Lereah says that continual problems and media reports about subprime activity may drive away buyers and reduce overall consumer confidence in the housing sector. Last, an increase in foreclosures could raise the inventory of homes in individual local markets, softening prices and the demand for homes.

But from a broader perspective, he says, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy.