Can you say "global economic meltdown?" - Dangers of a runaway mortgage market

The warning signs are everywhere. And conservative financial institutions -- insurers and pension funds -- are set dead in the path of the runaway train.

The long-awaited slowdown in the U.S. housing market is upon us. So far the deceleration is a long way from a car wreck. Housing sales and housing prices are still projected to climb in 2006, just not as fast as in 2005.

But over-revved markets generally crack up rather than slow down gracefully: They've built up too much momentum to handle a change in direction without at least a bang against the guardrail.

Adding to the odds of a crackup is the very peculiar nature of the investment market for mortgages. Right now, there's a huge disconnect between the folks who are making the mortgage loans and the investors who ultimately wind up owning the mortgages. The mortgage lenders who know individual mortgage borrowers the best -- and the risk they do or don't represent -- are selling their riskiest mortgages. The investors who buy them know nothing about individual borrowers and are relying upon the magic of the Wall Street derivative market for risk protection.

Sound like a car wreck waiting to happen?