THE Dow soared 200 points in a Christmas rush on Friday that belied emerging details that US banking, mortgage companies and credit rating faced collapse while the nation’s mortgage insurance industry plunged into chaos.

Nearly 180,000 US local councils were placed on credit watch, with the credit agency Fitch releasing another $US5.3 billion in credit downgrades involving 27 mortgage companies. The news emerged on Friday night, when the nation’s newspapers, even if they were following the story, would miss it.

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NEW YORK (Reuters) - American Home Mortgage Investment Corp plans to close most operations on Friday and said nearly 7,000 employees will lose their jobs as the lender becomes one of the biggest casualties of the U.S. housing downturn.

Experts said it is likely the Melville, New York-based company will have to seek bankruptcy protection, and no later than Monday.

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"Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years." ~ Warren Buffett

As we all know (or at least should know), the United States economy became imbalanced in the late-1990s as too much speculative capital surged into the Internet and Telecom sectors of the economy. As this speculative boom expanded, rising asset prices allowed the boom to move into the broader economy. Throughout the late-’90s, speculative funds and increased leverage played a primary role in the expansion of credit throughout the economy. If someone wanted cash and had a semi-viable story as to how he would pay it back, he could procure a loan or venture funds quite easily. This process played out throughout the economy, as consumers, businesses and every level of government piled into debt in order to finance projects for current consumption, with little or no concern given to having to pay it off. Our fiat monetary system, with limitless fractional reserve banking made possible by low reserve requirements and a general lack of prudence by our questionable Federal Reserve establishment, played a significant role in creating the initial imbalance.

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“We are sitting on a time bomb,” the mortgage analyst said — a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, “are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they can’t pay the debt.”

He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 — when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.

Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.

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