How humans handle risk has always been an interesting spectator sport.  What is so strange is that people seem to ignore risk until something terrible happens to them. Then everyone stands around asking, "Why didn&39;t we see this coming?"

The current disruption in the credit markets that spilled over into the equity markets last week is no different from tornadoes and earthquakes. If you live in the Midwest, tornadoes are a possibility and if you live in California, earthquakes DO happen. Financial tornadoes and earthquakes happen too.

While I&39;m on that topic, Lucy Jones, a scientist with the U.S. Geological survey, talked about risk last week. She said that the Coachella Valley area of Southern California – read "Palm Springs," one of the fastest growing areas – was way overdue for a major earthquake. As reported in the Los Angeles Times, she said that:

"the shaking could last more than 100 seconds, kill thousands, destroy homes, collapse the I-10 and I-15 freeways, ignite petroleum pipelines and leave untold thousands homeless in potentially searing desert heat. The long-term effects, she said, could be akin to the economic collapse of New Orleans and the Gulf region following Hurricane Katrina."

Now, how&39;s that for someone laying out a risk scenario? Yet, my guess is that if you went down to Palm Springs this afternoon, you&39;d find that real estate activity was virtually unchanged from a week ago. Should we actually get such a quake, it will likely that no one will remember Lucy&39;s warning, but they may bring it up again after the fact.

So it goes with sub-prime mortgages.  I sit in the epicenter of the sub-prime meltdown with many of the industry&39;s (formerly) biggest players just a few miles away.  I could see that their business practices were encouraging the development of loan products that were potentially dangerous to borrowers.  I could see that the outrageous commissions being paid to loan officers were encouraging unethical business practices.  I could see that the lack of regulation served to stimulate the growth of the industry.

Finally, I could see that gazillions of borrowers were being sold irrational mortgages that would jeopardize their financial future, the housing values in their neighborhood, and, potentially, impact the entire U.S. real estate market. And I wrote about it.

I think that Lucy Jones and I both must feel like Chicken Little.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.