This morning's Wall Street Journal [subscription required] leads with a discussion of the unexpectedly severe deterioration of the subprime mortgage industry. And the process that led to the subprime decline is happening now in private equity. This suggests the potential for an unpleasant surprise in the business of lending money to private equity firms.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems. Since these loans are so profitable, the market has grown at a 39% annual rate from $120 billion in 2001 to $625 billion in 2005.

But if a borrower can't pay back the loan, the costs of this rapid growth become apparent. Up until 2005, if a borrower could not pay back the mortgage, the borrower could sell the house and use the proceeds to pay the mortgage company. But with prices falling, this strategy does not work anymore. In October, borrowers were 60 days or more behind in payments on 3.9% of the subprime home loans packaged into mortgage securities this year -- nearly twice the delinquency rate on new subprime loans recorded in 2005. And UBS expects 2006 to be "one of the worst ever for subprime loans" with 80,000 subprime borrowers behind on their payments.