In 2004 and 2005 mortgage lenders were bending over backwards to get people into new homes with risky loans that were dependent on continued housing market growth. It's as if no one could foresee a housing market down turn.

A "Subprime loan" (unlike what its name implies) is a loan with a rate ABOVE the standard prime rate. It is usually offered to borrowers who would not otherwise qualify for a home loan. Borrowers desperate to get in on the housing boom of 2004/05 took these loans so they could afford homes with values above what a standard loan would dictate, or simply accepted these loans as the only alternative for buying property in the first place. Lenders were scrambling to write as many loans as they could and eagerly pushed these subprime loans as a means for getting their money into the mortgage market.

The risk is quite obvious. If property values slump or interest rates increase, owners will be paying for extensive loans on houses that aren't worth the value of the loan. At the time, most potential buyers were told that in a couple of years they could refinance to a better loan and reduce the risk. Unfortunately for these buyers and lenders, the housing market began to contract before this "couple of years" could pass. Consequently, the number of foreclosures is skyrocketing and the subprime lending industry is in crisis.

The ramifications for this squeeze have the potential of being quite dramatic. If the lending institutions near default; the government will have little choice but to bail them out with a lot of taxpayer money. This is only the least of the economic worries. During 2004/05 economic growth was almost entirely tied to the housing market. Refinancing provided consumers with the money they used to spend wildly. 77% of the private net worth gain during this time was tied to property value increases. As property values slump, the money to keep Americans spending is evaporating and all the wonderful sales figures for companies selling to consumers is also in a squeeze. This will likely cut at least a percentage point off the GNP growth and it has the potential of being even more dramatic.

The head scratcher is not that this squeeze is occurring; but rather, that some people are actually surprised by it. The real estate market has always been and will always continue to be cyclical. It is not a linear skyrocket upwards. Basically, the subprime lenders are getting what they deserve. People holding property that is worth less than their loan also get what they deserve. There is risk. Those that ignored this risk may very well find it coming back to bite them in the butt.