Imagine for a moment you're a mortgage lender. Your business has been good for the past few years. Homes are selling like hotcakes, and the closing costs and other fees you take in on each home sale keep growing as the prices of the homes you're financing grow. You've heard the talk of a housing bubble - all that business about trees not growing to the sky and such - but you're not concerned because you're a conservative lender.

You only lend money to people with the best credit ratings. Nothing but low risk loans. The appraisals all check out. The value of the homes you're carrying easily offsets the mortgages you're writing on them. In fact, in 35 years of home pricing history, home prices have never fallen. You're virtually assured it won't be more than a few months before appraised values rise well above the mortgage loan amounts.

And as the prices of these homes rise, you're just as happy to lend your credit-worthy mortgage holders even more money. And why not? The loan is secured by the value of the home. Your loan applicants have excellent credit ratings. Can you turn away money that just walks in the door? After all, if you do, your competitors will get all those loan fees and closing costs.

Life is good lending money to affluent, credit-worthy borrowers at the top of the food chain.

Check that. Life was good, until recently. This year, for the first time in the 35 years since anyone's been tracking them, home prices have actually fallen. They're down more than 2% on average over last year's levels.

Plenty of home sales are precipitated by sellers who lose their jobs or are transfered to another city. Some need to sell because of personal reasons such as divorce. Plenty of other sales have been precipitated by the expiration of the introductory interest rate on adjustable rate mortgages.

With steadily rising housing prices this steady stream of sellers is matched easily with eager buyers. Take away the steadily rising prices aspect, and you get highly motivated sellers. Highly motivated sellers drive prices down.

As a mortgage lender, this is the worst thing in the world for your business. Sellers who can't sell their homes for the amounts they've borrowed from you may not be able to pay. When they do sell, possibly in foreclosure, the first mortgage gets paid first. You might lose some or all of your second mortgage loan amount.

This is the reality that's hitting housing lenders right now. Yesterday's Countrywide Financial news was a result of just this sort of scenario. In their conference call they reported that more than 1 in 20 of their customers with good credit ratings to whom they had made home equity loans were past due at the end of last month. The news precipitated a good-sized sell off in the markets yesterday. Investors are now worried this sub-prime lending problem might spill over into the housing market as a whole.

A little worry is a good thing. It would have paid dividends to be a little more worried as many of these loans were made, but hindsight is always 20/20. Looking forward, let's hope yesterday's worry doesn't turn into tomorrow's panic.