At the opening session of Ellie Mae's inaugural Encompass user conference in March, somebody came up to me and asked whether I was going to do a story on black Monday for the subprime mortgage industry. Meanwhile, a packed audience of enthusiastic attendees was soaking up news about new Encompass features while MBA chief economist Doug Duncan, the keynoter, told them to expect a fairly positive economic outlook. So does that mean the subprime meltdown is overhyped? Don't think so.

The other day I got an e-mail ad showing a guy all bound up in rope, with the rope over his mouth as he struggled to tell somebody just how much he needed a loan, strapped as he was by baaaad credit. The expression on the guy's face was more realistic than the advertiser might have intended. He looked like a heroin addict crying out for his next fix.

You may not have seen this particular ad, but you've seen plenty like it. Do you have bad credit? Don't worry. We can find a lender dumb enough to lend you more money. Who cares whether you'll be in hot water again five minutes after you get your hands on the loot? Amazing. David Langston, CIO at Allied Home Mortgage, credits their new CFO Jim Hagen with inventing a new easy-sell loan product, the stated-FICO dream-payment loan as a sarcastic comment on the lengths to which subprime lenders have gone to throw restraint to the winds.

There's good reason to believe the mortgage industry has found itself heading up a national Ponzi scheme to make sure consumers, creditworthy or not, kept borrowing money to buy stuff at an unflagging pace. Meanwhile those who knew better kept wondering when the seemingly endless housing boom would come to a halt and expose our national addiction to spending money borrowed on overheated home equity. Wise mortgage industry professionals know the industry is plagued by overcapacity. With too much money chasing too few loans, any homeowner or home seeker who can breathe and chew gum at the same time qualifies as a member of an underserved market.

These days mortgage professionals who regard the current situation with gallows humor regularly visit the Mortgage Lender Implode-O-Meter (ml-implode.com) home page of Aaron Krowne, a computer scientist, mathematician, entrepreneur and activist who heads up digital research at Emory University's Woodruff Library. His site tallies the latest count of major U.S. mortgage lenders that have croaked since late 2006. When somebody first told me about the site, the count stood at 33 lenders who had disappeared in the subprime meltdown.

Though he does tout his site as a public service (and accepts donations via PayPal to keep it up and running), Mr. Krowne -- a self-proclaimed anarchist -- is not using his site to lobby for more predatory-lending laws. Instead, he has begun partnering with the MortgageMinister.com. The Mortgage Minister is a loan officer with four years experience whose conscience tells him to educate borrowers instead of fleecing them. He has a calling to lure the sheep away from the evils of debt addiction and prevent naive borrowing from unscrupulous lenders. If you want to support the ministry, that site also has a PayPal collection box.

The Mortgage Lender Implode-O-Meter site also has links to some good stories about the depth of the industry's involvement in subprime. Fortune editor-at-large Bethany McLean quotes figures from the Graham Fisher research firm showing that subprime mortgages issued shot up from $35 billion in 1994 to $625 billion in 2005. She also takes a look at the way rating agencies behave in a way that sweeps the severity of subprime losses under the rug of structured finance. A CNN article on liar loans by Chris Isidore looks at the chances of stated-income alt-A loans being next to tank.

I am not alone in wondering whether automated underwriting, a fairly recent innovation in the subprime sector, played a role in the meltdown by lulling subprime lenders into thinking they had risk management safely on automatic pilot. Some say the reverse is true, that greedy account executives have been putting deals together by having their brokers circumvent the procedure of first registering their loans online and thus submitting them to the automated underwriting scrutiny designed to keep loans within a lender's established risk parameters.

Mortgage Cadence's Mike Detwiler is one who says the AUS technology accurately reflected lenders' risk parameters but the companies themselves made a decision to push risk tolerance far beyond what it should have been. In the post-mortem, I'm sure we'll hear more about that, as FHA steps in to address the problem.

On the good news side, Mr. Detwiler reports that Mortgage Cadence had its biggest year ever in 2006, with 15 new enterprise LOS installations. He told me the company may outpace that in 2007, as 25 companies are looking at Mortgage Cadence to replace their old systems. And Allied's David Langston tells me his company is adding branches at a healthy clip, with 34 new branches added since Jan. 1 and doing just fine with solid government and alt-A loan programs. One thing that makes us more effective as a large company is a true geographic spread, he said. A downturn in any West Coast market would have no impact on our East Coast markets and vice versa.

And he also told me how much some folks from one of Allied's East Coast branches had enjoyed the mild weather in San Francisco during the Encompass conference. Mr. Langston said he has been working closely with the Ellie Mae corporate team to refine implementations in the Allied branches using Encompass. To their credit, he said, they have been very receptive to our suggestions and have been doing deployments without requiring any changes in the way the branches conduct business.