The mangled mortgage market is spreading monetary mayhem to a growing number of credit sectors throughout the financial world.
Mortgage industry related conditions are melting down credit cards, wrecking commercial deals, sweating even the most creditworthy customers and causing foreign banks to cover their assets.
Unfortunately, just like the credit card customer who enjoys years of cheap credit spending, only to wind up in a protracted 12-step recovery program, the mortgage market hangover isn't going to go away overnight.
Inebriated by speculative over-indulgence, Wall Street is reeling and the housing market hangs in the balance.
"The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania," wrote New York Times columnist Paul Krugman, in a recent opinion piece.
"The housing bubble was only part of it; across the board, people began acting as if risk had disappeared," he wrote on.
From the dawn of the predatory lending push in the late 1990s to the subprime system breakdown in recent months, de rigueur high-leverage, low-cost loans were the word and the way and the key to the latest rendition of the American Dream.
The word was, get in now, by any means necessary, before home prices skyrocket.
They did and they did.
During the boom, lenders branded ever riskier mortgages and the real estate industry herded homebuyers like sheep toward loans which buyers have since learned they couldn't afford.
Long and frequently considered "unsustainable" it was a housing boom fueled by risky mortgages never tested under the assembly-line production pace at which they were delivered.
Financing the American Dream this time around has opened a Pandora's Box.
First out of the box were foreclosures that mounted as adjustable rate mortgages (ARMs) reset and sent ripples of financial distress through households and communities of low, fixed-income home owners who realized they'd been sold a bill of goods.
Several studies reveal up to 2 million homeowners will lose their home before the market bottoms, due to poor lending decisions, fraud, consumer ignorance and a host other factors.
As foreclosures mounted, the feds moved in to re-regulate the industry, but by then it was too little too late.
Lenders failed, shuttered branches and, if they were still standing, began tightening underwriting on new risky loans and withdrawing offers for others. With the financing rug pulled out from under the stratospheric price of homes, speculators bailed, and fewer non-investors could afford to buy.
The supply of homes for sale and for rent swelled and home prices shrank.
Some real estate market experts were still murmuring about a quick housing market recovery when Wall Street tycoons began to suffer the same fate as the home buyer on Main Street -- a tapped out till.
Mortgages are often sold and repackaged as securities for sale to investors, but because of the added foreclosure induced risk associated with subprime and other risky loan-based securities, buyers (investors) balked and bailed out.
Two subprime loan-based Bear Stearns hedge funds, at one point controlling assets of more than $20 billion, this summer filed for bankruptcy protection, value all but drained from the funds.
Other such funds likewise have been crippled by the events.
Bailing investors aren't limited to the shores of America.
Credit Suisse Group more recently shut the door on lenders selling its subprime loans, second mortgages, negative amortization option ARMs, and two or three year ARM hybrids.
And just last week BNP Paribas, a large French bank, froze operations on three funds worth $2.2 billion, citing U.S. subprime market problems after investors pulled out of the funds in droves.
This week BNP's U.S. based Homebanc filed for bankruptcy, following in the footsteps last week of large home lenders American Home Mortgage Investment and New Century Financial Corp.
Krugman explains, "When liquidity dries up ... it can produce a chain reaction of defaults. Financial institution A can't sell its mortgage-backed securities, so it can't raise enough cash to make the payment it owes to institution B, which then doesn't have the cash to pay institution C -- and those who do have cash, sit on it, because they don't trust anyone else to repay a loan, which makes things even worse."
Sitting on money to lend is also crushing so-called Alt-A level borrowers, those with better credit than subprime borrowers, as well as prime home loan borrowers with the best credit.
Where mortgages are available for them, lenders loan small amounts with higher interest rates.
San Francisco, CA's Wells Fargo Bank recently curbed financing Alt-A loans and Charlotte, NC's Wachovia, stopped making Alt-A loans through brokers and smaller lenders while curtailing some ARMs.
The one saving grace in the mortgage mess has been mortgage rates for conforming loans (those $417,000 or less and eligible for purchase or guarantee by Fannie Mae and Freddie Mac) remaining flat and even falling in recent weeks.
Not so with jumbo loan rates (for less-protected loans larger than $417,000) which reached 7.35 percent last week, the highest since April 2002 according to Bankrate.com.
Jumbo loans are crucial to the growing number of high-cost markets like California and others with already-high home prices heavily inflated during the last boom.
And just forget using those zero-interest rate credit cards as a bail out. Credit card issuers are also beginning to raise rates, reduce credit limits and tighten controls over who gets plastic.
Capital One Financial, said Friday, what's in your wallet will begin to cost a lot more. A minority of its card holders enjoying credit at the bargain annual rate of 4.99 percent will soon have to pay 13.9 percent.
Even the otherwise relatively fit commercial sector is beginning to feel the liquidity drought caused by the overcast residential mortgage and housing markets.
A potential buyer for a 6.9 million square-foot portfolio of 100 properties, including those that house Apple and Microsoft offices in Silicon Valley's otherwise fit commercial market, was unable to find the asking $1.8 million in financing to close the deal last week.
The San Jose Mercury News reported that area real estate mogul Carl Berg was unable to sell the portfolio "In a tangible sign that the crisis crippling the housing market is spreading to commercial real estate ... ."
The vast majority of those who comprise the residential real estate market, home owners, real estate sales and lending businesses, home builders and affiliated industries, will survive this downturn unscathed.
But for those who don't, it won't be a pretty picture.
