A Sub-Prime Primer

A wave of defaults on "subprime," or high-risk, home mortgages has not only rocked the Dow; it also threatens to ripple through the economy. Here's how

WHEN HOMEOWNERS CAN'T PAY ...

Borrowers with poor credit and unusual loans have often taken on more debt than they can handle. And if rates rise, they are vulnerable to default and even foreclosure.

... MORTGAGE LENDERS GET HAMMERED ...

Many lenders resell their high-risk mortgages to investment banks. If defaults rise, the lenders are often forced to buy back the bad loans, which hurts earnings and stock prices.

... INVESTMENT BANKS LOSE BUSINESS ...

The firms that buy the loans usually repackage them and sell them as securities (for a profit, of course). As securities get riskier, there are fewer buyers. That means lower profits.

... INSTITUTIONAL INVESTORS ARE EXPOSED ...

Banks, hedge funds, insurers and mutual funds have been buying the risky bonds because they promise high rates of return. As defaults spread, that promise evaporates.

... AND THEY FLEE THE STOCK MARKET

The mortgage storm plus slowing consumer spending lead investors to look for safer bets than stocks. Another fear: tighter credit further weakens the housing market.