Just a few months ago, analysts and mortgage lenders were predicting the imminent end to the housing downturn and a relatively quick recovery. Housing problems were contained to subprime borrowers and those who had recklessly stretched themselves too far financially, they said.

So much for optimism.

The so-called soft landing heralded earlier this year is barely mentioned anymore.

“In the beginning, we were thinking the foreclosures were going to be limited to low-income, high-minority neighborhoods targeted by predatory lenders, [but] now we’re seeing a shift to the middle class,” said Ester Cadavid, a not-for-profit lender and counselor in Los Angeles.

Today’s optimism is now more typified by comments like those of Mark Zandi, chief economist at Moody’s Economy.com, and Rich Toscano, a financial adviser with Pacific Capital Associates. Zandi predicts, “The economy will bend further under the weight of the mounting housing and mortgage problems, but it will not break.”

Toscano, who is also optimistic after a fashion, says that although “[t]here will be individual pain for people who made the wrong decisions” and although “[w]e all may end up in a recession,” the good news is that “a Grapes of Wrath scenario where we all have to pile in the family car and look for harvesting work” isn’t something he currently envisions.

So much for optimism.

The latest news comes from Countrywide Financial, the nation’s largest mortgage lender, which reported July 24 that the situation is about to get significantly worse before it gets better. The reason, according to the New York Times, is that in addition to subprime borrowers, borrowers with good credit were also falling behind in their payments.

Countrywide’s bluntness surprised many in the financial industry. Chairman and ceo Angelo Mozilo said home sale prices were dropping “almost like never before, with the exception of the Great Depression.” Scary words, considering Countrywide originates more loans than any other company in the United States.

Approximately 5.4 percent of Countrywide’s home equity loans to customers with good credit were past due in June, more than double last year’s levels. More than 20 percent of its loans to subprime borrowers were also now past due. Consequently, the company, which reported second-quarter earnings down 33 percent, was forced to write down the value of its loans and other assets by $923 million.

Confirming Countrywide’s downbeat outlook were statistics on new home sales released July 26 by the Commerce Department. Sales of new single-family homes dropped by 6.6 percent in June and by 22.3 percent from last year’s level, making it the largest drop since January.

According to the Associated Press, this makes the housing industry downturn the worst in 16 years, although some areas continue to hang on. The number of home sales in the South rose by 7.6 percent, but were more than offset by declines in the Northeast, West and Midwest, where home sales fell 27.1 percent, 22.5 percent and 17.1 percent respectively.

Slowing sales are leaving growing numbers of homes on the market. Although the median new home price fell by 2.2 percent in June, “with inventories still way out of line, unless prices fall a lot more, the housing market will not turn around any time soon,” said Joel Naroff, chief economist at Naroff Economic Advisors. Countrywide says it does not foresee the beginning of an upturn in the housing market until 2009.

Luxury homebuilder Toll Brothers’ chief executive, Robert Toll, said last month that the housing market might not rebound before April 2008. Mr. Toll, who is becoming known for his optimism, revised his February opinion that the industry was “at the beginning of the comeback trail.”

The National Association of Realtors group also revised down its overly hopeful 2007 home sales estimates again on July 11, following six other consecutive downward revisions. For the record, the Realtors group now expects home sales to fall 5.6 percent in 2007, and prices to fall by 1.4 percent.

Yet, other news from Countrywide Financial, Wells Fargo and other lenders indicates home sales, and therefore home prices, may fall much further. Subprime loans may be drying up, and these lenders have decided to stop offering the industry’s most popular subprime loan altogether.

Why? Bond ratings agencies, such as Moody’s, have begun to downgrade and re-evaluate mortgage packages, virtually shutting down “the market for certain debt offerings that specialize in home loans,” reports the New York Times. Consequently, investor demand for mortgage-backed securities, commonly known as cdos (collateralized debt obligations), have plummeted.

Part of the reason banks had been so willing to lend money to subprime borrowers was the ready supply of investors willing to purchase the bundled mortgages (cdos) from the banks. However, with defaults soaring and cdo investment-grade ratings being revaluated, investors have disappeared. Few seem to want to be left holding the subprime mortgage bag—witness the two Bear Stearns funds which imploded last month due to huge mortgage write-downs on cdos they couldn’t sell at auction anywhere near the prices that were on their books.

With lenders like Countrywide now raising concerns about prime borrowers, in addition to subprime, a mortgage crunch could be looming—bad news for the housing market and the U.S. economy in general, which has come to rely on the home construction and remodeling industry, as well as on consumer spending financed by home-equity lines of credit.

The Trumpet has warned readers to prepare for a popping housing bubble for more than two years now. There is still time to prepare, but time is running out. Begin now to reduce your standard of living.