Much has been written about the so-called sub-prime mortgage meltdown in recent months. Last December, before it became prime news, I wrote a piece blaming the sub-prime industry for its own problems. While sub-prime loans may indeed provide a healthy path to homeownership for some folks, it was pretty obvious that the sub-prime market was a train wreck waiting to happen. Consider the following recipe:

1. Sub-prime lenders target folks that, for whatever the reasons, legitimate or not, have a history of failing to pay their debts as agreed.

2. Sub-prime loans carry far higher rates and fees than conventional loans, exacerbating an already difficult situation.

3. To compound the problem further, most sub-prime loans carry hefty prepayment penalties, preventing folks who may have cleaned up their credit from refinancing to a better mortgage.

If this recipe doesn't spell trouble, I don't know what does.

As the default rate increased among sub-prime borrowers, the originating mortgage companies lost their funding sources because investors got stuck with bad paper. In the last 12 months, dozens of sub-prime mortgage companies have closed their doors. It should have surprised no one.

We now have the question of spillover. Treasury Secretary Henry Paulson recently made a statement that described the sub-prime mortgage arena as "largely contained."

It appears that Secretary Paulson may have been wrong. The sub-prime problems are clearly affecting the so called Alt-A products. These loans are geared towards folks who typically have good credit but don't qualify for conventional financing for one reason or another. Like the sub-prime market, the problem with these companies is primarily due to the elimination of funds available to make these loans. The perfect storm of declining property values, rising interest rates, and re-setting ARMs has made institutional investors who buy the loans pretty gun shy. Alt-A lenders don't have any more money to lend.

Now the question becomes whether or not the credit crunch will spill over into the "A" credit conventional market. I'm afraid it has to a degree. In my 20 plus years in the mortgage business, I'm seeing things that I have never seen before.

First, jumbo 30 year fixed mortgage rates have skyrocketed. Jumbo loans exceed the loan limits designated by Fannie Mae and Freddie Mac, the two giant companies that buy mortgages from banks, which is $417,000 in most areas. Traditionally, there is only about a .25 to .5 percent spread between conventional and jumbo fixed rate loans. Rates on fixed rate jumbo paper are currently about 1.50 percent higher than conventional fixed rates. The spread is more than triple the norm of the past.

Second, I have noticed that fixed rate mortgages have not been following the movement of the ten-year Treasury bill as closely. Conventional "A" credit mortgage loans are typically viewed as a safe investment – almost as safe as U.S. backed treasury bonds. But the mortgage crisis that started in the sub-prime arena has made investors of all mortgage backed securities, including "A" paper, skittish.

Henry Paulson is wrong. The sub-prime meltdown is indeed spilling over to the conventional mortgage market, albeit not to any devastating degree. Institutional and individual investors of mortgage backed securities see the housing slump. They witness the rise in defaults and foreclosures. They foresee the millions of ARMs adjusting to higher rates. They witness the millions of loans with negative amortization, causing balances to rise rather than fall.

Their appetite for mortgage backed securities is waning.

It will be interesting to see how this plays out. My take is that the Federal Reserve won't ease credit quickly enough to prevent an economic slowdown. Eventually this will result in lower interest rates, including conventional "A" credit paper. As far as the sub-prime market, well, that was a fool's game from the start.

Now let's play the blame game. Who, or what, is really to blame for this debacle? Here's my take:

First, we can certainly place a good bit of the blame on the unethical lenders in the mortgage business. I have been an outspoken critic of my own industry. How many misleading mortgage solicitation letters have I received touting programs such as "Interest Rates as Low as One Percent"? As a mortgage professional, I know immediately that these letters are bogus. But a lot of folks don't understand and can be duped into a mortgage that is not in their best interest. Hopefully most of these crooks are now back on the used car lot.

Second, while I remain a harsh critic of unethical and illegal mortgage activity, I remain a believer in Caveat Emptor (Let the Buyer Beware). The American consumer needs to shop smartly. The best way to choose a competent and ethical loan officer is to ask for referrals from trusted sources such as friends, family and neighbors. Beware of solicitations in the mail and on the internet that appear too good to be true.

Third, some blame needs to be put on the real estate market. Up until recently, real estate values were appreciating at a frenetic pace, making home ownership more difficult to afford. Consumers were hit with sticker shock as they shopped for homes. The mortgage industry responded to consumer demand with mortgage products that enabled them to borrow more money to buy more expensive homes. Suddenly, interest only loans and option ARMs became the rage.

Last, some blame needs to be put on our beloved government. Here's the paradox: On the one hand, the government scolds and decries the mortgage industry for pushing exotic mortgage programs to folks who can't intrinsically afford the debt. On the other hand, politicians speak of the necessity for the mortgage industry to do its part in promoting affordable housing for folks that wouldn't normally qualify for conventional financing. I recently watched an interview with Senator and presidential hopeful Christopher Dodd who said he was a "huge supporter of sub-prime lending". While Senator Dodd was making a distinction between sub-prime lending and the abusive "predatory" lending practices, the fact remains that sub-prime lending, if it ever re-emerges in the marketplace, will always carry higher rates and fees to compensate for the riskier borrowers. And while the sub-prime mortgage sector may indeed help some folks, it's pretty obvious that many who took out a sub-prime loan had an unhappy ending. Senator Dodd cannot alter the market forces that make sub-prime lending expensive.

If the consumer has a complete understanding of his financial picture and mortgage options, he can make the right decision as to the size of his mortgage and the type of mortgage. t is up to me, as a professional loan officer, to ensure that this happens. Anything short of this means that I'm not doing my job.