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Extra10/8/2008 12:01 AM ET

Who's getting slammed by credit mess?

The financial fiasco is moving far beyond a  liquidity problem on Wall Street. Here's how the pain is being spread around.

By U.S. News & World Report

This is the big one, the biggest financial crisis since the Great Depression, according to financial historian Niall Ferguson. "It is, in fact, unlikely that even $700 billion will suffice to contain this great credit crunch we're witnessing," Ferguson says.

Rather than being contained by the emergency government action taken to date, the credit crisis has gone viral. Here's how it is affecting us all:

The homeowner

Think of credit as the Benedict Arnold of the housing implosion. Cheap and abundant credit was the turbopump for a housing bubble that allowed even folks with checkered credit histories to get in on the action and bid home prices higher.

But as home prices have come down, credit has switched sides. Now a reduction in the supply of mortgage credit is putting additional downward pressure on the housing market and threatening to prolong the worst housing slump since the Depression.

By keeping would-be buyers on the sidelines, the credit tightening reduces housing despite falling prices, says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School.

So while tighter mortgage credit isn't the leading factor behind the national decline in home prices -- bloated inventories of unsold homes are a bigger problem –- it is making matters worse.

Tighter credit will make the downturn in home prices, adjusted for inflation, roughly a third worse than it otherwise would have been, Harvard economist Ken Rogoff says. He expects home prices to stabilize toward the end of 2009 after falling about 30% from peak levels.

Nouriel Roubini's outlook is even darker. The New York University economics professor expects a decline of at least 40% from the peak. "The credit crunch is really having a meaningful, negative impact on the worsening situation in the housing market," says Roubini, whose downtrodden economic outlook has earned him the nickname "Dr. Doom."

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Want to buy a McMansion? Big loans to even well-qualified borrowers are getting more expensive. And although fixed mortgage rates are still relatively low, banks, facing higher delinquencies, have jacked up their lending standards for applicants of all stripes.

Harder to find are mortgages requiring down payments of 5% or 10%, and 20% may again become the norm. (Overall, reports an average 30-year fixed mortgage rate of just more than 6%. A 30-year jumbo mortgage is hovering around 7.27%.)

Continued: Lending standards get tight

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