As history has proven, extending to much credit to too many people is a potential disaster. Not saying that it's going to happen, but I'd like to be prepared to jump in on this if it does.

With all the mortgage programs out there for people with all kinds of credit problems combined with the tendency of people to over extend themselves, the mad rush to buy while rates are low and the proliferation of ARMs and high LTV loans so people can afford houses they can't really afford, there is certainly potential for a major default disaster.

Only in rare cases do people realize their credit problems are habitual and work to curb those habits. The majority of people I know and have worked with who have declared bankruptcy are back in trouble within two years. I do not expect this to change.

Let's look at a simplified scenario similar to the 80's, but on a smaller scale, where interest rates rise and people have to deal with payment shock. With most ARM caps set at 5% over start rate, this translates to about a $1000 potential increase per month for a $300,000 ARM starting at 5% (from $1600 P&I to $2600 P&I). Add tax and insurance increases to that and it can become a big problem. The number of people dealing with payment shock could be much higher than in the 80's due to overextension and the fact that some lenders are seeing nearly 1/3 of their new mortgages are ARMs. Of course, there's no point in refinancing because the payments won't be significantly lower. I imagine some people will cash out and live on those savings for a while, but that won't last. Obviously, it's hard to imagine such a scenario three years from now, but there's a lot of precedent for unexpected economic conditions.

The obvious route is getting the foreclosed real estate at a reduced cost. But I'm looking for something shorter-term, similar to shorting stocks, options or futures, but for real estate. Perhaps a form of mortgage-backed security? I'm not too familiar with these types of investments and I don't know if these particular things exist, but perhaps someone does.

Since most subprime mortgages are 2/28's, if the planets do align and this does come to pass, you can expect to see the fallout in about 3 years. I want in. If it doesn't happen, it should be an interesting discussion anyway. Thanks.

Sell or buy credit derivatives with underlying RMBS (RMBS = residential mortgage backed securities).

Say that 3 times fast...