American Home Mortgage (AHM) gives up the ghost

American Home Mortgage (NYSE: AHM) fired almost all 7,000 of its employees late yesterday. According to CNN Money, the company will go into bankruptcy immediately.

AHM made $59 billion in loans last year, many of them with adjustable-rates. Many of the company's loans were to the middle part of the housing market and were no sub-prime mortgages.

Another lender, Accredited Home Lenders (NASDAQ: LEND), also showed signs of distress yesterday. After closing at $8.35 on Wednesday, shares fell as low as $3.98 Wednesday.

The mortgage lending fall-out is much likely to get much worse. While many of the problems with sub-prime mortgage problems have now been exposed, loans to more credit-worthy borrowers are likely to fall apart fairly fast.

A large number of adjustable-rate mortgages made in the last year will moved to higher, fixed rates over the next 24 months. Some consumers will not be able to make the larger payments. With home inventory rising and prices falling, they may also find it impossible to sell their homes, unless they want to take a large loss.

The mortgage troubles today may only be the beginning of a much uglier period.

Douglas A. McIntyre is a partner at 24/7 Wall St.com.