I'm in beautiful Sedona, Arizona, with all my friends in the auto leasing business. They all own leasing companies in Arizona, California,and Oregon. Naturally, they have asked me, the one real estate person in the group, to explain the mortgage crisis to them.

They also asked me to explain blogging, but I give up on that one. They are car geeks. What can I tell you?

So here is what I told them:

Imagine for a moment that car payments were not fixed, and could morph into something hundreds of dollars higher at some point during the ownership of the vehicle.

Unprepared for this, the owner of the car is left few choices. Maybe he could sacrifice something else in his life, and re-arrange his budget? But what if the slowing economy (recession?) has impacted his income? What if he has already spent any extra money on fuel just to run the car?

Okay, since he can't afford the payments anymore, he decides to sell the car. His bank says he owes $25,000 to pay off the loan. Yet, the Internet tells him the car is only worth $18,000 if he is lucky. He tries to trade it in, but the dealer will only give him $15,000. Hey, gas prices are high, and no one wants a used gas guzzler. He puts his car on Craigslist, but no one calls.

Feeling TRAPPED, and betrayed, he decides to "let the car go" (back to the lender). This they call a "voluntary repossession". Once this happens, his ability to get a loan on a car in the future will go straight to hell. This same decision is made hundreds of times over as car owners everywhere come to the conclusion they cannot afford their new higher payments.

Lenders who make auto loans become inundated with repo vehicles that they must re-sell. Since they are banks, and not auto dealers, they must sell off the vehicles for thousands less than the normal retail channels (auto dealers).

But wait! The dumping of all of these vehicles at fire sale pricing impacts the dealers as well. Why would a consumer pay full retail when so many repo vehicles are for sale everywhere at rock bottom prices? The price of used cars plummets. The price of new cars plummets. Everyone that owns a car, now has an asset that is worth far less.

Since the VALUE of the car is the security of an auto loan, lenders are MORE than a little scared, they are losing their collective butts. The loans still on the books are far less secure. The cost of re-marketing all the repos is killing them.

Bottom line? They are losing millions on everything to do with loaning money on VEHICLES. So what do they do? They take a giant step back and decide they REALLY DON'T WANT to loan money on cars.

Lenders get out of the auto loan business in droves. Those that remain raise rates. They make GETTING the loan for a car much harder to do. They severely restrict what it takes to qualify for a car loan.  Down payments and credit scores must be much higher. And those with bad credit (sub-prime)? Well, can you say BICYCLE?

Gosh, even though cheap cars are everywhere, no one can can get a dang loan to buy one!

Now the government smells a crisis brewing and decides to step in, creating even more mud in the water. They decide to "guarantee" banks won't lose any money on car loans. They give rebates out to everybody so they can make the higher payments, and hopefully stem the tide of repos. They encourage the auto lenders to "work with" those that are in danger of losing their cars, but the banks resist since they are already awash in red ink.

There is much finger pointing going on as the media decides to blame the entire car industry for the "mess". Everyone IN the car business watches helplessly as their income plummets. Everyone who has a business that depends on people owning and driving a car begins to suffer as well. And people start to use the "R" word (recession) more and more. Who would have thought how much the health of our economy depended on people owning CARS?

No one seems to know where to start to get the economy back on track.

Is there a morale to the story? Yes. Never underestimate  the devastation that can occur by the betrayal of solid lending practices.