Ok - Here's the question of the month.  Why are we going through a liquidity crunch and why is affecting lenders the way it does? 

Starting with a bit of history.  In the old days, our grandparents time, there were mainly Savings and Loans institutions that received savings from a large amount of people, paying them a smaller interest rate, then lending out the money to a smaller number of people for a higher interest rate.  This difference in rates allowed the banks to make their money. Think "It's a Wonderful Life" starring Jimmy Stewart.  Banks were able to stay in business over a long time due to the assets of their loans being right in their community.  This is still done in some areas of the country. (Even in my hometown).

Move forward to the present.  Banks want to make more money.  Deregulation occurs, banks start buying each other out, more deregulation occurs and banks are able to move across state lines. Banks and other powers that be come up with the following method that allows more folk to take advantage of mortgage rates and be able to get into home loans.

Banks have a certain amount of credit they have with other banks, lenders, servicers, etc.  They sell mortgages to Mr. & Mrs. Consumer.  The banks then bundle up these mortgages and sell them to servicers who are the ones who send out letters as to when bills are due, late payments are made, escrow accounts are short or paid out of, etc.  These servicer in turn take all the mortgages from all the different banks and lenders, bundle them together and sell them to Wall Street.  Wall Street in turn waves their financial wand and bundles them all together into bonds or mortgage backed securities.  Wall Street takes these bonds and sells them to other countries, retirement funds, or you and I.

Since the underlying mortgages that these bonds are backed by have started to adjust, folk have been unable to make the payments, i.e. default or foreclose, and the bonds start sinking in value.  Since the bonds are unable to be sold on the open market a chain reaction starts going in reverse.  Wall Street has to cover what they said they would pay out so they stop buying certain bundles from the servicers.  The servicers are in turn stuck with what they bought and tell the banks they can't buy the more recent mortgages that have been written.  These banks and lenders have all these mortgages in their pipeline that haven't had payments started.  Since these mortgages represent borrowed money, the banks and lenders owe interest on the loans.  A few loans don't make much of a difference.  Think though if there are several million dollars that are tied up.  This can amount to daily fees of 10's of thousands of dollars each day.

There are two choices - raise interest rates on mortgages that have been already closed on (and be prepared to be sued by several different lawyers) or close their doors.  The business decision of closing one's doors and laying off thousands of people is much easier than being sued and having to pay million's of dollars in settlement costs and such.

Hence the reason for the liquidity crunch.  This is rather simplified.  To get more in depth knowledge, there are several excellent sources on the web.