For two years I have been writing about the potential for an implosion in the real estate market, not the highly discussed bubble, which I never believed in, but the impact on the real estate market when the sub-prime lending industry crashed and burned. Of course, today, you can’t pick up a paper without reading a tale of woe about borrowers and another story about lenders biting the dust.

There is another problem, however. Some investors who hold mortgage backed securities collateralized by those loans may be subject to rules that, in the event of a downgrade in quality, will force them to adjust the book value of those securities down to current market value.

If Moody’s Investor Service downgrades a security and it drops to say 90% of its face value, the investor has to take a write-off on the books. Even worse, some investors may not be allowed to keep investments other than those rated investment grade. They will have to sell them on a downgrade. Other institutional investors may not want to have “downgraded quality” securities listed on their end-of-quarter reports and may decide to sell the securities, thus changing a paper loss into a real loss.  And of course, this being a supply and demand world, increasing the supply of bonds for sale reduces their value even further.

Clearly, whatever segment of the market is made up of buyers who aren’t credit-worthy is going to be in trouble. For the rest of the market, which I will define as real people using real money to make down payments and getting loans that they can actually afford, it’s going to be business as usual. Those of us who have specialized in high quality loans are still going to be servicing our clients with traditional products.

One additional opportunity, however, is that some properties currently owned by people who can’t afford their homes will be coming on the market—some before and some after foreclosure. There are times when more money can be made during a downturn than when things are rockin’ along. We might see real buying opportunities for those who are in the market for income property.

Bottom line, I think that we have seen that the brave new world as defined by the sub-prime lenders, and it was fraught with peril. Give me the boring old world any day.