Credit crunch has only just begun: James Saft

By James Saft

LONDON (Reuters) - Falling real estate prices, massive bank write-downs and a quickening drumbeat of slashed credit ratings adds up to one thing: The credit crunch has only just begun.

While no surprise, given that we are coming out of a worldwide debt binge, the fact that loans are harder to get for even the best borrowers raises the risks of a recession.

It also puts the Federal Reserve in a tough spot, caught between the imperative of keeping the blood flowing in credit markets and genuine concerns about inflation from more expensive food and energy.

Evidence of the credit crunch can be found under every rock.

Washington Mutual, WM.N the sixth largest mortgage U.S. lender, said on Wednesday it expected depressed home loan demand and falling real estate prices through 2008.

WaMu is also the subject of an investigation by New York State over alleged inflated home appraisals, under which both Fannie Mae (FNM.N) and Freddie Mac (FRE.N) have been subpoenaed.

Hardly news likely to make loan officers more likely to extend a firm, friendly handshake.

Also on Wednesday, Morgan Stanley announced a $3.7 billion loss from its subprime mortgage exposure, while Merrill Lynch MER.N upped its tally of exposure to risky subprime and structured credits by $6.3 billion, to $27.2 billion.

Merrill included for the first time $5.7 billion of subprime exposure at Merrill Lynch Bank USA and Merrill Lynch Bank & Trust, while also upping by about $600 million its exposure to CDOs after an insurance policy Merrill had taken out against losses was terminated following a dispute with the unnamed seller.

Meanwhile, Moody's cut ratings on $33 billion of debt of structured investment vehicles (SIVs). SIVs, off-balance sheet bank affiliated structured financings, total more than $300 billion, and are a threat to find their way back on to bank balance sheets.

There is no sign of a viable SIV bailout fund, despite ongoing talks including the U.S. Treasury, Citibank (C.N) and others.

And as losses and provisions mount daily, bank balance sheets are pinched, leaving less still to lend.

"Today, the ultimate vision that must be dealt with is that the largest asset in most Americans' lives, their home, is dropping in price, while the cost of financing...is rising," Annaly Capital Management CEO Michael Farrell wrote in a note to shareholders last week.

"We are witnessing the piercing of a worldwide debt bubble."

LOAN OFFICERS JUST SAY NO