Wall Street never fails to take the last five minutes and project it out for the next decade.

When confidence abounds in our economy and financial instruments, bankers, investment houses, and investors become more and more willing to take risks. Yet as soon as any one of the financial sectors faces difficulty, everyone races for safety.

Look at the chain reaction from the Russian crisis. Investors ran from the ruble, from Russian investments, and then from hedge funds that invested in the ruble or any other foreign securities.

Then investors deserted the banks and brokerage houses that had any money overseas, causing havoc with the shares of community banks-many of which couldn't tell a ruble from a bagel.

To community bankers, the trade-off between risk and yield has shown itself to be of special importance in the market for subprime mortgage loans.

As the Federal Reserve Bank of Dallas reported in its excellent second- quarter report, subprime lending exploded in the recent boom. Mortgage lenders and government-sponsored enterprises such as Freddie Mac and Fannie Mae lowered their standards on a borrower's income and credit history.

Until the early-1990s refinancing boom ended, subprime borrowers had always felt they were captives of the market. Mortgage companies, left with high overhead, high production expectations, and shrinking margins in the conventional market, pushed for yields and volume by lending to people with less than perfect credit. The result was mortgage availability for many who were formerly denied, but at yields as much as 3% higher than on conventional loans.

But the pendulum swung again. In late 1997 faster repayment on the good loans and higher delinquencies and defaults on others brought soaring writedowns to mortgage lending institutions. That reduced their stock prices and access to the capital markets, and increased concern about future earnings.

And what about the other recent swing in the mortgage market from quality to yield: the willingness to make loans of 125% or even 135% of value, either directly or through home equity second-mortgage loans?

These loans are not subprime; the borrower is usually of top credit standing. Even so, accepting collateral that is so far under water when the loan is made can be dangerous. Repossession might be necessary because of a change in the borrower's income, a divorce that leaves the mortgage payments ignored, or some other factor that brings delinquency and default.

Why do banks make these loans? One reason is competition. When one bank goes to 135%, others feel they must go along or lose good customers. In addition, they expect to sell the loans in the secondary market.

But the pendulum can swing. When mutual funds, finance companies, and other buyers seek safety, lenders can be badly burned. And as usual, the losses can far exceed any added yield the more risky loans could earn.

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