I ended yesterday’s commentary with a trick question:  What is the easiest way to make real returns of nearly 10 percent on one’s money? The answer is, there is no easy way –

unless, of course, you’re in the mortgage lending business, where deflation-adjusted returns approaching 10 percent may soon be possible. How so? Well, if you live in Colorado, the answer may be a little more obvious, since mortgage foreclosures in the Rocky Mountain State are now the highest in the nation. It was recently reported that one out of every 338 Colorado homes was in foreclosure in March, versus one out of 1,138 nationwide.

As one might expect, home prices in Colorado have been softening as a result. I live twenty minutes from Denver and can attest to it. Some of my friends in the real estate business have corroborated it as well. They say the regional market is weakening and that property values have actually begun to slip in some of the pricier neighborhoods.

Foreclosure Nation

Against this backdrop, consider that interest rates on some popular consumer-credit products have recently been adjusted upward to 8.75. Imagine having to pay off an 8.75 percent home equity loan when the value of your property is falling, even if by just a percentage point or two. But that is exactly what is happening all over Colorado, and it threatens to become the norm in other regions of the country, so rapidly are foreclosures metastasizing across the U.S.

What this implies is that millions of Americans may soon find themselves paying higher real interest rates  on home equity loans than many savvy money managers have been able to earn for their clients in recent years. Clearly, this is a trend that could not go on for long without causing a significant economic dislocation. Unfortunately, there does not appear to be a way to reverse it, least of all by opening the credit spigots as Helicopter Ben has assured us he would.

How Credit Boomed

Realize that in recent years loose money has come into existence mainly through the mechanism of inflated property values. Of course, consumer credit can only mushroom if there is a swelling asset class to borrow against. Given the epic monetary expansion needed to ward off deflation following the dot-com crash and 9/11, residential real estate was the obvious choice, the only asset class not already leveraged to the hilt that was big enough to do the job. But our properties are too deeply in-hock by now to conduce yet another cloudburst of money from the sky. Moreover, it’s likely that even massive easing is no longer capable of overcome the juggernaut of deflation that has started to emerge in the residential sector.

That is why I wrote here yesterday that the game is finally over on Wall Street. Stocks are headed for a spectacular fall, and probably soon. If you’ve been buying put options every month in anticipation of such a collapse, don’t make the mistake of taking your profits when the Dow Average is down a mere thousand points in a few days. That’ll be just a shot across the bow, as the Mother of All Deflations declares war on debt.