So much has been written on the subprime lending situation already, but I thought it might be best to keep it in perspective.  The subprime lending situation, now termed in turmoil, can be summarized into a few simple steps.

Step 1:  An uneducated borrower who does not have a large amount of income wants a house that they cannot possibly afford.

Step 2:  A homebuilder who is possibly a builder as well, sees an opportunity to lend a large amount of money to said borrower, and possibly many of them in similar circumstances, and lends them the money, with the idea that large amounts of money can be made down the road.  That lender might even use rather unscrupulous methods.

Step 3:  The borrower discovers the fine print.  Perhaps the loan has a balloon payment, or interest rates go up.

Step 4:  The borrower defaults.

Step 5:  The lender realizes that too many of it’s loans are to borrowers that lack the ability to pay.  Profits drop, money is lost, and companies suddenly are in trouble.

Step 6:  Meltdown.

Look for the signs for a subprime lender.