Government officials have been emitting a lot of gas about how problems in the mortgage market are nothing to worry about because they're limited to the subprime sector. But today's New York Times [registration required] shows that the problems have spread to the higher credit quality Alt-A tier.

I am new to the mortgage market -- particularly all these credit tiers like subprime and Alt-A. But I spent a summer in Washington a few decades ago working with the Federal Deposit Insurance Corporation (FDIC) helping it dig out of an avalanche of bank failures due to the collapse of the real estate market. And the current situation strikes me as much worse because it's much bigger and due to securitization, the contagion is in the hands of pension funds, insurance companies, and hedge funds as well.

Here's the situation. Alt-A loans -- made to borrowers with credit ratings that fall between prime and subprime -- make up 10% of all mortgages outstanding at the end up 2006 and 18% of new loans made last year. And combined, subprime and Alt-A loans account for 21% of loans outstanding and 39% of mortgages made in 2006.

But the government has been issuing statements designed to assure us -- falsely -- that the mortgage problem is limited to subprime.