There are still reasons to believe the housing heartache won't badly hurt the rest of the economy, but not as many as a few days ago.
Countrywide Financial Corp., which handles nearly a fifth of all U.S. mortgages, reported soaring delinquencies, falling profits and increased default risk last week. Baltimore's First Mariner Bancorp disclosed similar problems.
Sales of existing homes fell for the fourth month in a row, and more than expected. New-home sales were even worse. Homebuilders also reported worse-than-predicted results as sales plunged and assets depreciated.
And the stock market, one proxy for the larger economy, had its worst week in nearly five years.
"To this point we have not seen significant spillovers from the housing sector into other parts of the economy," Federal Reserve Chairman Ben S. Bernanke told Congress nine days ago.
Wonder what he thinks now?
Nobody expected the home and mortgage businesses to thrive anytime soon. But nobody expected Countrywide chief executive Angelo R. Mozilo to start comparing the current environment with that of the Great Depression. Nobody figured on a spike in soured loans to homeowners with good credit ratings.
Nobody expected the collapse of two New York hedge funds investing in subprime mortgages to kick up dust in Baltimore. Nobody expected a bunch of First Mariner's mortgages in Northern Virginia to go bad less than three months after they were issued.
"I've never had anything like this happen to me," First Mariner Chief Executive Officer Edwin F. Hale Sr. said last week.
This from a guy who has been wheeling and dealing for decades and became chairman of the Bank of Baltimore after it had to foreclose on 13 hotel projects in the early 1990s. Hale took control of the bank through a proxy fight and sold it before starting First Mariner.
Until very recently, economic optimists had comforted themselves with the notion that housing problems were "contained."
The biggest were confined to Florida, California and maybe a few Midwestern states, they said. Only the worst combinations of upward-adjusting interest rates and poorly qualified borrowers would cause defaults. Homebuilder stocks were still a good long-term bet.
Unemployment was still low, implying plenty of personal income to pay mortgages. Things would pick up in the spring home-buying season, people figured.
But there was no season, it is now apparent. At least not enough of one to prevent a downward spiral in states such as Nevada, Arizona, Illinois, Ohio, Indiana, Maryland and Virginia.
The salve of federal money that has protected the Baltimore-Washington region from economic pain is losing its effectiveness. Half of First Mariner's problem loans were in Northern Virginia, home of a defense-spending spree since 2001. The rest were in several other states.
First Mariner had sold the loans to New York investment house Bear Stearns Cos., but it was required to repurchase them when borrowers began missing payments. This month Bear Stearns disclosed that two of its subprime mortgage investment pools called hedge funds were all but worthless.
Hale thinks some of the mortgages may have been issued to "flippers" seeking a quick buck, violating contract terms requiring the money to be applied to a primary residence.
Even so, the delinquencies don't speak well of the Northern Virginia economy or, by implication, Maryland's, which has been operating in the same federal bubble.
Now even mortgages issued to well-qualified borrowers are at risk. The Mortgage Bankers Association had already reported an uptick in soured "prime" loans for the first quarter. Foreclosure rates in Indiana, Ohio and Michigan exceeded those in Texas during the oil bust in the 1980s, the association said.
Last week Countrywide said more borrowers with good credit records were missing payments - and not just on loans whose low "teaser" rates were adjusting upward. Some were delinquent because of unemployment, which suggests an economywide problem. And the crescendo of adjusting loans continues; plenty of three-year adjustables issued in recent years have yet to reset to market rates and ding family finances.
Homebuilder stocks are revisiting lows of last summer, and now trauma has spread across the securities spectrum.
It wasn't just most stocks that sold off last week. Corporate bonds took a header, too, which could presage a credit crunch and slower growth.
All this occurs on an economic foundation that wasn't solid to begin with. National employment growth has slowed from last year, and so has Maryland's.
The metro-Baltimore economy "has taken a sharp hit in the past six months, with job growth coming in well below the national pace thus far this year," Economy.com's Rakesh Shankar wrote recently. "This is a marked deviation from the previous five years."
It's not hopeless. The low dollar will boost U.S. exports. Interest rates should fall (it's time to start now, Chairman Bernanke), which will help. Maryland is getting tens of thousands of defense-related jobs, which will help even more. We won't see a recession.
But we will see even slower growth, and the housing industry will be the chief ball and chain.