The New York Times reports that since we've had such a catastrophic run with home mortgages, it's time to watch the collapse of commercial ones. The same names surface when it comes to the collapse of our financial system -- in the case of commercial mortgages Deutsche Bank (NYSE: DB) ($25.1 billion), Morgan Stanley (NYSE: MS) ($22.1 billion), Lehman Brothers (NYSE: LEH) ($40 billion in commercial mortgages and property), and Citigroup, Inc. (NYSE: C) ($19.1 billion) are among the biggest holders. They are also big names in Auction Rate Securities (ARS).

Why do people think that commercial real estate could be tanking? Here are four reasons:

• Declining property prices. The Times reports that the Moody's/REAL Commercial Property Price Index has dropped 12% since its peak last October.
• Commercial mortgage write-downs. According to the Times, Morgan Stanley reported commercial mortgage write-downs of $400 million and Wachovia (NYSE: WB) said it would take at least $1 billion worth of such write-downs.
• Potential Riverton default. The Times reports that Riverton, a 1,230 unit Harlem development, was premised on the idea that developers could convert "lower-priced rentals to apartments priced closer to the higher market average." But the Times reports that Monday Fitch "issued a negative watch on part of the Riverton Apartments trust" since the developers had not made much progress -- threatening commercial mortgages that Citi and Deutsche Bank hold.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) both trade at near 52-week lows. They have been taken down by large writes-offs in their mortgage portfolios. Now the question is whether they will have to raise billions of dollars in capital the way that firms like Citigroup (NYSE: C) have.

Putting money into the companies would benefit the housing and financial markets. According to The Wall Street Journal: "Of course, raising that much fresh capital could have benefits if it allows the companies to continue acting as a backstop for the troubled housing market."

But investors owning common stock may not come off as well. Freddie Mac has a market cap of $12 billion. If the company has to raise $10 billion to offset losses, shares could drop from their current level of just over $20 to under $12. If the mortgage markets get much worse going into the second half of the year, there is not guarantee that they won't have to go back to the markets again.

With a $22 billion market cap, Fannie Mae is a bit better off.

With both stocks already down around 70%, the market can't be thinking that the news ahead is good.

Douglas A. McIntyre is an editor at 247wallst.com.

Citigroup (NYSE: C) is going to make share cuts in it mortgage loan business. That may make the market for getting home loans harder as one of the major sources for buyers moves away from lending.

According to The Wall Street Journal, "The bank said it plans to reduce its $200 billion portfolio of mortgage loans by about 20% over the next year and afterward will focus its underwriting on loans that can be sold on to other investors." Closing lending offices will also save the company money.

As Citibank and other banks cut their lending into the home-buying markets, the standards for getting mortgages will certainly go up. So could interest rates as banks ask of higher payments to offset potential risk.

By putting in their home-lending horns, banks may make a recession much deeper. The housing market cannot recover without buyers. Banks are making it harder for buyers to finance purchases.

While the Fed is providing more capital to banks at lower rates. those benefits are not being passed on to the consumer. Treasure and the Fed are going to have to come up with a program that actually encourages banks to take the "cheap" money they are getting and lend it into the markets.

Otherwise, the housing mess could get much worse.

Douglas A. McIntyre is an editor at 247wallst.com.

Today's announcement that UBS AG (NYSE: UBS) will take a $10 billion write-down of its risky "super senior debt" and collateralized debt obligations (CDOs) -- is just the latest in a string of announcements where the false prosperity of borrowing comes face to face with the true prosperity of Asia and the Middle East, which have been enriched by high oil prices and Chinese commodity demand.

Just as Citigroup Inc. (NYSE: C) received a $7.5 billion capital infusion from Abu Dhabi Investment Authority a few weeks ago, UBS got $11.5 billion from the Singapore Investment Corporation (GIC) and a Middle East investor believed to be the government of Oman.

With our $9 trillion in government debt, hundreds of billions in government deficits, $2.4 trillion in consumer installment debt, and $1.3 trillion in subprime mortgages, it's been easy to create the illusion of prosperity. But when it comes time to pay off that debt, those whose prosperity results from charging more for a product than it costs them to make it, rather than borrowing, end up in the driver's seat.

During the recent housing boom, people with lousy credit were not the only ones financing their purchases with subprime mortgages. The Wall Street Journal [subscription required] reports that in 2005, 55% of borrowers with good credit ratings -- who could have signed up for prime mortgages at lower interest rates -- got subprime mortgages instead.

Specifically, the Journal analyzed $2.5 trillion in subprime loans made since 2000 and found that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores -- above 620 -- high enough to often qualify for conventional loans with far better terms. The study by First American LoanPerformance, a San Francisco research firm, found the proportion rose to 61% by the end of 2006, up from 41% in 2000.

Why did this happen? The mortgage brokers got higher commissions for selling subprime loans. On average, U.S. mortgage brokers got 1.88% of the loan amount for originating a subprime loan, compared with 1.48% for conforming loans. As a result, the brokers did not notify borrowers with good credit of the "yield spread premium" equal to 2% of the loan amount -- or $8,000 on a $400,000 loan -- if a borrower's interest rate was an extra 1.25 percentage points higher than the listed rates of the subprime lender, in this case the now defunct New Century Financial.

How could we keep this from happening in the future? Bright red letters on the cover of a mortgage document disclosing the broker's compensation scheme might be a good start.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

As expected, Freddie Mac (NYSE: FRE) announced a $6 billion preferred stock sale on Tuesday and told its investors that their dividends will be cut in half to just 25 cents so that it can hold on to enough cash to satisfy federal regulators. The dividend cut is Freddie's first cut since the government-chartered enterprise became a public company in 1989.

Freddie hopes that the preferred stock sale will be enough of a cash infusion to offset losses from the subprime mortgage mess, or it could be forced to curtail future lending and sell off some of its portfolio of mortgages. If that happens the mortgage cash crunch already seen in the housing industry could get much worse. Private investors already have fled the market. If Freddie can't play, then that puts the burden on Fannie Mae (NYSE: FNM), which also reported loses in the past quarter.

What will it mean to the market if Freddie has to cut back on lending? Less money will be available than there is now to buy mortgages on the secondary market. If banks that initially make the mortgage can't sell it on the secondary market, then they will have to hold the mortgages in their own portfolios. By selling mortgages to the secondary market, which includes Freddie Mac, Fannie Mae, and whatever private investors or international banks are left to play in this volatile market, banks that initially loaned the money can then loan more money.

Another day, another bad headline for Countrywide Financial (NYSE: CFC). The New York Times is reporting that Countrywide has received a federal subpoena related to possible abuses of bankruptcy laws in Florida.

One of the issues relates to excessive and unwarranted fees that some say Countrywide is charging troubled homeowners. As I blogged earlier this month, one recent study found that roughly half of mortgages going through Chapter 13 bankruptcy contained questionable fees.

Countrywide Financial may have accomplished something pretty unique: exploiting its customers and behaving in an ethically questionable manner while also losing money hand over fist for its shareholders.

It's kind of like a baseball player using steroids and hitting .220 with 3 home runs.

Either way, CEO Angelo Mozilo's tan still looks fabulous.

E*Trade Financial Corp. (NASDAQ: ETFC) imploded today after the company warned of worse-than-expected earnings and a Citigroup (NYSE: C) analyst said that the company might have to file for bankruptcy protection.

Shares of the company, which has cut earnings forecasts four times this year, plunged to levels not seen since 2003. E*Trade, which lost $58.5 million, or 14 cents a share, in the period ending September 30, expects 2007 profit of between 75 cents and 90 cents, a range big enough to drive a tractor-trailer through. Shares of the New York-based company have plunged 53%.

In a note to clients, analyst Prashant Bhatia said that poor management has "put the viability of the franchise at risk" and that "bankruptcy risk cannot be ruled out," according to Bloomberg News. He cut his rating on the stock to "sell" from "neutral."

In yet another sign of the growing pressure on consumers, retail sales rose 0.3% in August, less than the 0.5% economists have expected. Excluding autos, sales fell 0.4%. This data will likely pressure stocks and underscore the call from Wall Street for the Federal Reserve to cut interest rates at the September 18 meeting of the Federal Open Market Committee. (Update: Consumer confidence remained low in September, further bolstering the case for a rate cut).

There are plenty of economic signs for investors to ponder. The Wall Street Journal is reporting that the amount of borrowing by banks under the Fed's primary credit program surged to $7 billion, the highest level since just after 9-11. Prices for imported goods unexpectedly fell in August because of declines in oil and natural gas prices, providing a temporary check on inflation, according to Bloomberg News.

Fed Chair Ben Bernanke's next move will affect the housing market in general and specific lenders such as H&R Block (NYSE: HRB). Here's how Bernanke's thinking cascades through the economy:

• Increased credit risk aversion. The Wall Street Journal (subscription required) reports that Bernanke may see increased bank risk aversion measured by rising term premiums -- the additional return a lender demands for making longer rather than shorter-term loans -- as a reason to cut rates.
• Hits housing whose decline slows the economy. According to AP, UCLA forecasts that a recession may result from this risk aversion's impact on the housing market.
• Slamming mortgage originators. This hit to the housing market hurts mortgage originators -- DealBook reports that H&R Block's Option One subprime mortgage unit is slashing an additional 575 jobs on top of the 615 job cuts it announced in May.

I do not envy Bernanke -- no matter what he does at the Fed's next meeting, he will get criticized. Wall Street expects him to bail it out by cutting interest rates. Many in Congress agree with Wall Street but for different reasons -- they want to curry favor with voters who are facing foreclosures. Meanwhile, some believers in free markets would like the Fed to ignore those calling for rate cuts -- keep rates where they are to control inflation -- and let the market quickly and efficiently cull the failures.

In what was billed as the speech of his career, Fed Chairman Ben Bernanke told investors that he will continue to keep a steady hand on the nation's economy and that he wants the markets to sort out their problems with a minimum of government involvement. Any rate cut may not come as quickly or be as dramatic as some on Wall Street expect.

'It's not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions," the text of his speech given today says. "But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."

The stock market, which had risen this morning ahead of the speech, pared back some of its gains. Last I checked, the Dow Jones industrial average rose 62.19 points to 13,300.92 and the Nasdaq Composite Index was up 16.75 to 2,582.85.

I know it's the last thing anyone wants to read about these days, but today we get another sign of just how bad the foreclosure situation is getting in America. July saw a 9% jump in the number of foreclosures from June, which was already running at disastrous levels.

During the month of July there were a total of 179,599 foreclosure filings. That works out to be a 93.4% jump from the same month last year when there were 92,845 filings. Definitely not a pretty picture.

Just to put those numbers a little more in perspective. One out of every 693 homes were foreclosed in the month. The worst state in the country in July was Nevada, which had about three times as many filings as the national average, with one out of every 199 households filing for foreclosure.

While Nevada was falling behind the national average, foreclosures in Florida actually fell by 9% during the month but are still running 78% higher than June of last year.

Unfortunately, I think that we are going to see these numbers continue to rise over the next couple of months before things start to even themselves out.

Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.

if Ben Stein is right that people who are worried about the subprime mortgage crisis are being "chicken little," then there will be plenty of clucking going on following yesterday's announcement from Capital One Financial Corp.(NYSE: COF) that it was shutting down its GreenPoint mortgage unit.

As the Wall Street Journal (subscription required) points out, Capital One bought this business as part of its $13.2 billion acquisition of GreenPoint Financial Corp. The company now is shutting 31 locations, firing 1,900 workers and taking a charge of $860 million, or $2.15 per share. To top it off, Capital One is slashing its 2007 guidance by $5 a share.

What's scary is that GreenPoint didn't even sell subprime mortgages. It sold loans to people who lacked sufficient documentation to qualify for the best rates.

When the dust clears, it will show that the real estate boom was fueled by rampant mortgage fraud. People got loans that they couldn't afford and are now paying the price. Congress needs to take action to make sure this doesn't happen again.

It's only a matter of time for the next shoe to drop.

Thornburg Mortgage Inc. (NYSE: TMA) Chief Executive Larry Goldstone said there is a "crisis of confidence" in the mortgage market.

No kidding.

Shares of Thornburg fell about 9% after Goldstone made that insightful comment on CNBC. They are down 45% for the year amid concerns about the subprime mortgage meltdown. Thornburg sold about $20.5 billion in mortgage-backed securities today to return to "business as usual" -- whatever that means.

Worries about subprime mortgages continued to weigh-down the market, as did the drop-off in oil prices caused by weather forecasts that indicated Hurricane Dean wouldn't hit the oil-producing areas of the Gulf of Mexico. The Dow Jones industrial average and the Nasdaq Composite Index managed to hang onto positive territory for now as investors continued to hope -- make that pray -- that Fed Chairman Ben Bernanke will eventually cut interest rates.

News in the housing market has gone from bad, to worse, and back to bad again. Real estate and mortgage markets that are starting to stabilize after hovering on the brink of disaster during much of the summer. (Update: Housing numbers released August 24 showed an uptick in new home sales in July over June -- a positive surprise). Central banks around the world, including the U.S. Federal Reserve have bolstered a financial system crippled by excessive sub-prime lending.

Still, many experts believe the financial crisis could worsen from here, dragging more homeowners and would-be homeowners into the mess. Given all this, you are probably wondering what the mortgage meltdown means to you. Let's look at these questions:

What if you have a mortgage with a company that goes bankrupt, do you still have to pay?

Yes. If your mortgage company files for bankruptcy, another company will take over the servicing of the mortgage. The new owner of your mortgage will expect you to pay every month. If you stop payment because you think your bankrupt mortgage company won't care, prepare for the consequences. I posted more about this here.

What happens if you're applying for a mortgage with one of these troubled mortgage companies?

You might not qualify for a mortgage that you could have gotten a month ago. If you started the home buying process, say a month ago, and you haven't locked in a rate that you could afford, chances are good that your options have gotten worse. (Even if you have locked in a rate, the mortgage company might try to get out of the lock if there's any legal wiggle room.) That's because there's less money around for mortgages since the credit crunch started a few weeks ago. The people who get that mortgage money will be the ones willing and financially able to pay a higher rate.