A lively debate is ensuing as to why the mortgage industry is unraveling and who’s to blame for the growing credit crunch that is sabotaging the housing industry. Wall Street analysts, main street investors, corporate executives and government bureaucrats all disagree on which mortgage company will be the next to trip and fall into bankruptcy. But they all agree on one thing — the mortgage meltdown is far from over.

Skyrocketing foreclosure filings on subprime loans, those made to borrowers with poor credit, have caused huge losses for Wall Street hedge funds and other buyers of securities backed by those mortgages. Meanwhile, nervous lenders have responded by tightening their lending standards, making it more difficult and expensive for real estate investors and homeowners to borrow money, according to new survey conducted by the Federal Reserve in July. Moreover, mortgage lenders have also begun raising interest rates or cutting off credit for other types of loans, including Alt-A loans, a grade between prime and subprime.

In the last year, dozens of mortgage lenders have collapsed as foreclosures have soared on loans made to people with poor credit during the housing boom. Even the largest lenders aren’t immune. Countrywide Financial Corp., the largest U.S. mortgage lender, reported that foreclosures reached a five-year high in July. And this week Countrywide said it was having trouble borrowing money on a short-term basis, sparking fears about the possibility of a Countrywide bankruptcy. Yesterday, the nation’s leading mortgage lender was forced to tap an $11.5 billion line of credit to address its looming liquidity crunch. This unusual step taken by Countrywide only fans the fears about the problems facing lenders.

Between 2000 and 2006, defaults remained low because home prices were rising, interest rates were at historic lows and borrowers who fell behind on payments were able to simply refinance their mortgages — or sell their home for a profit. Now, however, with prices declining and interest rates rising a growing number of Americans can’t make the payments on their mortgages, triggering a rise in delinquencies and defaults.

But the bad news doesn’t end there.

Many mortgage companies raise cash to keep making new loans by re-selling mortgage debt on the secondary market. But the secondary market for mortgage-backed securities is essentially frozen, meaning that investors are unwilling to buy up mortgage debt at all. The growing turmoil in the credit markets could hurt the earnings and financial conditions of mortgage lenders like Countrywide.

So, what can be done to ease the growing financial crisis crippling the real estate industry?

Some possible solutions could include:

1. Lowering interest rates.
2. Reducing real estate taxes.
3. Reducing homeowners insurance.
4. Pressuring mortgage lenders to helping at-risk borrowers refinance or restructure their adjustable-rate loans into low-interest, fixed-rate 30-year mortgages.
5. Creating real estate tax incentives to stimulate foreclosure investors into purchasing and repairing foreclosed homes for re-sale or renting purposes.
6. Educating and counseling subprime borrowers about the dangers of risky adjustable rate mortgages, interest only loans and other precarious financial instruments.

Given the fragile state of the economy the government needs to step in and stabilize the rattled financial markets. Central banks around the world need to make cash available for lending and to keep interest rates from rising amid signs that credit is drying up.