It’s starting to get scary out there in mortgage land.

Up until last week, many folks shrugged off the so-called subprime meltdown as a mess that was fairly isolated. It was assumed to be a problem contained mainly to the lenders and financiers who should not have concentrated so much money in risky products, not to mention those with poor credit who probably should not have taken out expensive home loans to begin with.

But last week we saw the meltdown metastasize into the higher-than-subprime mortgage market. Fear took over; instead of an old-fashioned run on the banks, there was a run on the hedge funds. So many investors yanked their money out of a Bear Stearns Cos. mortgage fund that the company had to cut off withdrawals last week. It didn’t much matter that the fund had little or no exposure to subprime loans. People just wanted out.

Likewise, American Home Mortgage had to back out of mortgages it had committed to fund because its financial backers had pulled the rug from under it. Never mind that American Home doesn’t deal much in subprime loans but in “Alternative A” loans, which are made to people with less-than-prime but better-than-subprime credit scores.

One dealer was quoted in the Wall Street Journal saying “it’s starting to sink in that this is a broad-based issue that’s not going to go away any time soon” and that the mortgage market “is pretty much terrified at this point.”

All this has real implications in Southern California, which may be the capital of Alt-A loans, given the fact that many otherwise prime borrowers must go the Alt-A route to afford the pricey homes here. What’s more, a number of companies have been and could be hurt, such as IndyMac Bancorp in Pasadena, a big Alt-A lender, whose stock sunk more than 13 percent last week. Homebuilders could continue to be roughed up. The stocks of KB Home in Los Angeles and Ryland Group in Calabasas have lost more than a third their value so far this year.

True, the panic has not spread into the prime mortgage market and it may not. Still, a gradually spreading toxic spill like this one could have an ugly effect in many and unexpected places. (Already, such non-mortgage companies as Burlington Northern Santa Fe and DuPont blamed the sinking housing market for their second-quarter profit woes.)

“The subprime slime is oozing,” Gary Shilling, the oft-quoted market watcher was quoted as saying last week. “As home equity evaporates, that takes out the foundation of strong consumer spending growth, which has been the mainstay of the economy.”

It’s getting scary, indeed. Be careful out there.

—

Here’s hoping that last week’s huge recall of toys by Mattel Inc.’s Fisher-Price is the final straw. Some adult from the United States needs to monitor how things get manufactured in China which exports more consumer goods to the United States than any other country.

Lead paint on nearly a million Fisher-Price toys is bad enough, but we’ve seen a long train of tainted stuff from China lately, including anti-freeze in toothpaste. Besides being dangerous, these problems are expensive. Mattel said the problem will cost it $30 million, but that may be wishful thinking. You can hear the lawyers scribbling away on lawsuits now.

Creating a cabinet-level import czar to monitor manufacturing in China, at least temporarily, may be in order.

Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

.