The mortgage crisis has finally hit the car business. Yep. dealerships are closing and car sales have plunged by about 35%. And while the temptation may be to think of "gas prices" as the reason, the real reason is "mortgage crisis".

Fast becoming known as CREDIT CATASTROPHE.

Did you know that about 25% of cars used to be "cash sales" that were really just an equityline withdrawal? Those equitylines are long gone, along with the ability to use the "Bank of Home Appreciation" to buy a car.

Combine that with a creditscape that resembles the frozen tundra in Siberia and you begin to get a clue of what's wrong with car sales.

FACT: When you cannot finance a house or a car, demand plummets. Economics 101: Less demand, lower sales and lower prices. Any car that loses its ability to be financed (for example, a car with a salvage title) loses about half of its value.

If all this sounds familiar (like what's going on with the housing industry) don't be surprised. 

With one obvious exception: In the car business being "upside down" is just business as usual. No one freaks out and walks away from their car just because they owe more than its worth. Heck, people need to get to work after all.

You know what they say: You can sleep in your car, but you can't drive your house.

Maybe we should consider having dealers who take trade-ins on houses. No one would need to have a foreclosure, and the bank wouldn't need to market the houses. Homeowners would still choke at the LOW price the dealer would pay, but they would have an escape hatch, and could go rent a nice house for a lot less than the house payments.

Many of you know our family owns an auto leasing/financing company. Yours truly cut her teeth in the lending world by financing an endless stream of luxury cars to Silicon Valley hot shots (during technology boom), then real estate hot shots (during the housing boom). That was life before the mortgage business/crisis, but after 20 years in the car business, I think I understand the economics of it pretty well.

Now if only I could understand hot shots OR Porsches....which remain a total mystery to me.

It was obvious that it would only be a matter of time until the car business crashed. Each night as husband  and I walk the Akita after dark (if you have an Akita you understand the after dark part) he gives me the latest on financing cars from the auto leasing world, and I give him the latest on financing houses. We compare notes.

The writing has been on the wall for awhile.

As existing equitylines became frozen, and new equitylines became impossible to get, car buyers had to rely on a different kind of financing. Many just chose to keep driving the clunker instead, or use other financing. That was okay for awhile, but then auto lenders started to tighten guidelines.

They decided that they did not want to lend to borrowers with "neg am" mortgages. "Automatic approvals" (their version of stated income) became obsolete. Certain vehicles (models that lose value quickly) became impossible (too risky) to finance. Subprime auto loans disappeared.  Lenders (like Wells Fargo) just said enough is enough and got out of the car loan business altogether.

And the number of lenders shrunk. In a big way. Especially those willing to lease cars (since this financing depends on the value of the car holding up).

All of this got very little press because hello? There is a mortgage crisis hogging the spotlight these days. But it is a very big deal because it demonstrates a few of things worth understanding.

1.  Getting any kind of financing will become more difficult. For a long time to come. Get your credit fixed. Make sure your income can be documented. Save your cash. Maintain the old clunker and the old homestead.

2.  We don't need to worry about "inflation" when it comes to purchases that need to be financed. Lack of financing options will keep houses and cars cheap. Buy low, if you can. If you need a used truck, go get it now. Those with the cash win the game.

3.  Far fewer players that loan money. Huge losses in the credit market. More and more pent up demand. Do these things lead to lower rates, or higher rates? Economics 101.

Written by Janet Guilbault, Mortgage Lending Expert Based Out of the San Francisco Bay Area