This analysis from Wharton in Philadelphia describes the strategic run up to the current issues.  It also implies the possibility that there might be a soft landing out of this, but its a definite maybe.  In particular the tie to the overall capital markets is worrisome.

The final factor was the mushrooming in the 1990s of “securitization,” the bundling of home loans into bond-like securities that could be bought and sold on the secondary market. This allows lenders to get loans off their books so they can lend more.

Fannie Mae and Freddie Mac, the quasi-governmental lenders, had long sold mortgage-backed securities, but these companies were restricted to making prime loans. Once other lenders realized money could be made from subprime borrowers, they began bundling these loans into securities. “What happened in the middle 1990s was the development of private-label mortgage-backed securities, as opposed to these quasi-public enterprises which had implicit government backing,” Wachter says.

Source: Knowledge@Emory

The problem really took off when rates began to rise, and even though the rise seems relatively small to most, the impact on these sub-prime loans was a gigantic 40-50% increase in monthly payment.

Because of the Fed hikes, homeowners who received these loans in 2005 are now finding their monthly payments rising by 30% to 50%, leading many to fall behind in payments. “None of this would be an issue now if we did not have 17 straight increases in rates,” Thomas says.

The focus of problem is also geographic with certain predictable areas to be impacted the most.

This is an ominous finding for inner-city neighborhoods where aggressive loans are prevalent. Broader markets at greatest risk are in Florida, Arizona, the District of Columbia, Nevada, California, Illinois and Utah, Wachter and Pavlov say.