The loans that got us into this mess were generally the first to fall. Variable rate mortgages written without documentation for people with sketchy credit histories shocked nobody as their slide became an avalanche. But, the good stuff is starting to follow. An increasing amount of fixed rate mortgages offered to borrowers with solid credit histories are feeling their ways to foreclosure. Blame unemployment for this one. When people can't work, it gets pretty hard to pay the mortgage.

Fixed rate, high quality mortgages had a foreclosure a year ago. Last quarter, it jumped to 33%, according to a Mortgage Bankers Association report. As this happened, the amount of homeowners behind on their payments or in foreclosure just set another record high ... for the ninth month in a row. Subprime mortgages are headed in the other direction. Low quality adjustable rate mortgages are now 16% of new foreclosures -- compared to 35% last year. And, more than 18% of Federal Housing Administration loans are anywhere from one payment behind to in foreclosure, with California, Nevada, Arizona and Florida worst off: together, they accounted for 44% of new foreclosures.

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When the financial crisis really got into full swing, a lot of banks ended up taking TARP money. Some banks needed it, and some banks were forced by Treasury Secretary Henry Paulson to take it.

Wells Fargo & Co. (NYSE: WFC) was one of those banks that was forced to take TARP money, and now it is making plans to pay the TARP money back.

Here's the interesting thing though. While many of the larger banks have paid the TARP money back, Wells Fargo says it is going to pay the money back without having to go out and raise additional funds for the bank -- something other large banks, like Goldman Sachs Group (NYSE: GS), didn't do.

So, the Dow dropped 220 points today and investors felt the New Year was spoiled. It will probably get much worse so today may actually have been a good warm up.

Wall St. expected the financial, housing, and auto sectors to be hard hit. Ford Motor Company (NYSE: F) hit a 52-week low today. A number of the banks, investment firms, and home builders are as far down as they have been in years. CNBC made comments at mid-day that both Merrill Lynch & Co., Inc. (NYSE: MER) and Citigroup, Inc. NYSE: C) were preparing lay-offs and that Citi might have another $10 billion in write-downs. No one sane expects the sectors involved with housing, finance, or credit to rebound in the first half of the year.

The malaise among consumers has already spread to retail shares. Holiday spending was weak. Target Corporation (NYSE: TGT) has already warned it will miss numbers. Most of the other large retailer are likely to follow suit.

Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.

Subprime loans have been in the headlines, not in a good way. Lenders have lost billions. Homeowners have lost homes. It's a real big problem. But for the lenders the problems may only be starting.

While subprime loans are defaulting, there are loans that weren't subprime when they were made and have been paying regularly. But that may change due to their structure. These loans were made at interest rates below the current market rate, called teaser rates. These teaser rates were written for a year or two or even longer. Once those teaser rates expire, the loan then adjusts upward to current interest rates for home loans.

When the new rates adjust higher, so do the payments. Some homeowners won't be able to afford the new payment schedule. The actual number of those is unknown until the end of each month, when the payments are due and aren't made. While interest rates are moving downward at the moment, they may not move down far enough to help these borrowers. That means more mortgages may default over the next several months or years as the teaser rates become current. Only time will tell how many that will be. Not even the lenders know how bad this problem is since there's no way to estimate how many borrowers will stop paying.

According to The New York Times, "House Democrats introduced legislation on Monday that would for the first time let homeowners sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying."

This might be a little bit hypocritical -- it might even be extremely hypocritical. It's not that I doubt that a lot of innocent people got screwed and ended up with mortgages they couldn't afford. But the fact is that Washington's homeownership fetish is as much of a culprit as anything else. From President Bush's 2002 State of Union speech:

Members, you and I will work together in the months ahead on other issues: productive farm policy -- (applause) -- a cleaner environment -- (applause) -- broader home ownership, especially among minorities

Ben Bernanke told us in May that the impact of subprime mortgages collapsing would be contained. But The Financial Times begs to differ. FT reports that leading bankers are trying to calm the global markets even as they admit that the shockwaves from the U.S. subprime collapse could put private equity deals on hold for the next few months.

Is Ben Bernanke wrong? How could a former Princeton economist not understand that problems in one category of loans might make banks nervous about other loan categories? Or is it simply that Bernanke took his job as economic cheerleader in chief a little too seriously?

One banker thinks it could be three months before subprime's damage takes its foot off the brakes of private equity. Bob Diamond, Barclays president, predicted the consequences of the subprime collapse could take more than a year to be resolved. However, he said the leveraged loan market should recover more quickly: "We would expect at some point over the next two to three months to see that market at more normal volume levels."

Maybe Diamond is right and Bernanke is righter. But is it possible that their predictions are just wishful thinking? I don't know. What do you think?

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Bloomberg is reporting that Deutsche Bank's traders made an accurate bet on the negative future of subprime loans, and profited handsomely for the bank. According to the article, DB stands to make $270-$540 million from these trades alone. DB trader Greg Lippman put on the trade through the sale of ABX index contracts.

While many often assert that trading is gambling and companies like Goldman Sachs Group, Inc. (NYSE: GS) and Deutsche Bank are going to regret their continued funding of their proprietary traders, I tend to believe that banks with interesting proprietary strategies and disciplined proprietary traders stand to benefit from their trading divisions. For example, DB's subprime trade has effectively balanced out the losses the bank will incur as a loan company. However, one day I'm sure there will be a proprietary trader blow up similar to Amaranth's Brian Hunter.

An astute BloggingStocks visitor, Gordon, has written forwarded us an interesting analysis of a subprime borrower which suggests that the subprime meltdown is not solely the fault of unscrupulous lenders. This analysis -- written by Jonathan of MyMoneyBlog -- indicts one borrower as well.

Jonathan cites the case of Ms. April Williams, the main character interviewed in a Wall Street Journal [subscription required] story, 'Subprime' Aftermath: Losing the Family Home. The Journal reported that "Williams has until August to pay off her mortgage or vacate the two-story Colonial at 5170 W. Outer Drive, where she and her husband have lived for 11 years."

Jonathan points out that Williams could have exercized more fiscal prudence than she did. He found that Jonathan's husband had a precarious job on Ford Motor Co.'s (NYSE: F) assembly line. But that did not stop the family from taking out a $20,000 line of credit to purchase stainless-steel appliances, custom tile, a new bay window, central air-conditioning, a backyard koi pond and a $50,000 Lincoln Navigator luxury SUV.

Jonathan concludes that the lenders could do a better job of explaining loan terms and borrowers could use a bit of common sense in taking on debt. Makes sense to me.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Ford.

As subprime lenders continue to face the music for lending to buyers with low credit and high risk, the situation may only get worse before it gets any better. New Century may not agree with this, but many industry pundits and mortgage hawks are thinking that 2007 may be a massive write-off in terms of effort and time wasted. Semi-proof of the coming doom-n-gloom was announced by the National Association of Realtors yesterday, who announced that the subprime mortgage situation "will weigh heavier on the U.S. real estate market than initially projected." Yep, had to see that one coming.

The twin pillars of the continuing lending industry nightmare are tightening credit standards and increased foreclosures, according to a spokesperson for the NAR. Tightening credit standards were likely to come back once greedy subprime lenders actually realized that low and behold, economic conditions and housing markets may, gasp, change and may make foreclosures rise. In turn, credit standards go back to where they've been from a traditional lending perspective and those considered in the subprime market start getting squeezed out.

On lighter news (heh), the group also stated that new home sales are now expected to plummet 14.2% while existing home prices are expected to drop 0.7% after a slight rise at the start of 2006. In other words, the housing market in this existing cycle peaked somewhere before the middle of 2005. Ever since, the slide has been visible but only slightly pronounced. Now, it is in full swing.

When I logged onto Amazon.com to check out the new releases in business books, this headline jumped off the page: Real Estate Sale: Save up to 39%.

The headline was followed by this: Whether you're a real estate professional or a first-time home buyer, find all the guides you'll need for becoming a landlord, finding a mortgage, selling properties, and investing in one of the most time-tested and popular strategies for building wealth, all at up to 39% off for a limited time.

Among the deals:

• Flipping Properties: Generate Instant Cash Profits in Real Estate, which is 33% off.
• How to Be a Quick-Turn Real Estate Millionaire, which is 35% off.
• Investing in Duplexes, Triplexes, and Quads, which is 35% off.
• Why We Want You to Be Rich, which is 37% off (this book would be a ripoff at 99% off, in my opinion).

Granted, most books are on sale at Amazon (NASDAQ:AMZN). That's why I love it. But it does seem a bit unusual that they're advertising especially deep discounts on real estate books. One possible conclusion: people aren't buying them. If we go with the theory that the bull market in real estate was in fact a speculative bubble, this makes sense.

I'm not a huge fan of Suze Orman, but the one thing that I appreciate about her approach is that she brings basic financial topics and common sense to the everyday U.S. citizen who knows little to nothing about how to best conduct their financial lives. It's a shame that financial education is not taught in most public high schools these days along with history and arithmetic, because that sets many kids up for financial failure later in life. But I digress.

While Orman can help make you more financially savvy, there is a contingent of the population that is not heeding her advice -- or any advice, for that matter. Specifically, I'm talking about overextending yourself to attain that McMansion (and everything else you can get with a huge HELOC). Once your finance company starts adding to that cheap mortgage payment -- and it will -- you can find yourself way over your head.

You know what I'm talking about -- "adjustable" ARMs and interest-only mortgages. Why on earth do folks buy these? Put simply, to have the material possessions that present the appearance of financial success -- but are based on just the opposite and a lack common financial knowledge. For a while, the facade works. But when that interest rate goes up or those principal additions kick in, the hurt really starts.

Are massive foreclosures on the near horizon? If I had a Magic 8-Ball, it would read "all signs point to yes!" There is already a glut of housing in many areas of the U.S. and adding even more homes for sale from foreclosures will be disaster for certain areas -- and the realtors that serve them most likely. HUD signs may be more commonplace soon, and subprime home loans and even normal loans will go into in default in what some predict as being in record numbers.

General Motors Corp. (NYSE:GM) reported this morning before the market open that it actually made a small profit in its last quarter (a reverse from the year-ago period), but still missed analyst forecasts. What this will do to GM shares is something we will see this morning. GM said that there was a large improvement in its core marketplace -- the North American market -- but that the subprime lending mess was hurting its financial arm, GMAC. Here we have a red flag, albeit not a surprising one.

GMAC has been hailed as the savior of GM in many past years as the company continuously lost huge amounts of cash from its automotive unit but made huge amounts of cash from its finance arm (GMAC). GMAC lends money for everything from car loans to full mortgages, so when these overextended mortgage loans like ARMs and interest-only loans became the lend du-jour of the day, of course GMAC did not want to miss out on that lucrative little profit center. The thing is, the in-progress subprime lending implosion will hurt it along with every other lender that was short-sighted into short-term profits at the expense of the financially ignorant consumer.

GMAC is now feeling the heat, though, just as GM's auto operations are staging a stunning comeback from the days of SUV craziness that was reigned in by rising gas prices. In a fast-moving reversal of fortune, GM now has to deal with a steadier auto operations unit to fight back at Toyota Motor Corp. (NYSE:TM) with problems in its finance arm at the same time. This company just can't get a break, but it just asked for this one. GM's net income in the latest quarter of $950 million, or $1.68 per share, was helped by the sale of 51% of its GMAC finance arm. Excluding the sale, EPS came in at $0.32 or $180 million for the quarter -- but analysts were expecting $1.19 per share. To CEO Rick Wagoner: don't let any black cats cross your path soon.