Because the real estate market is cyclical, downturns are always expected.

The current general housing downturn started last fall when the number of new and existing home sales dropped along with average selling prices.

Whenever the housing market falls off, it has a rippling affect across the general economy. That’s why, understandably, everyone hopes it will be short-lived.

Beyond the real estate market downturn, the problem in the mortgage marketplace is much more significant — for our economy and the financial foundation of our free society.

And, we have not — as yet — been told the whole story. First, let’s recap the latest about what we have heard so far.

We have heard about the steep increases in bankruptcy filings. Noteworthy of late is that consumer bankruptcy filings nationally “increased 17.3 percent in August from the previous month,” according to the American Bankruptcy Institute (ABI).

And, last month’s 74,607 filings represent an increase of “31.2 percent over August 2006.”

ABI Executive Director Samuel Gerdano noted, the “up tick in August bankruptcies continues the trend we’ve seen all year.”

In other words, ‘the bear has been loose and mauling people in a rampage.’

We have also heard about the steep increases in foreclosure filings.

Noteworthy here is that data just released show “foreclosures in July up 9 percent compared with June, and by 93 percent over the year before.”

Those numbers are stark — and troubling — and suggest a crisis.

And, those numbers also point to what lies underneath — that ‘we have not heard’ as yet — that will confirm the crisis.

So, what is it that we have yet to hear about that is underneath the waterline? And, what is it that, like the proverbial iceberg, could rip open a hole in the hull of our Ship of State and sink the U.S.S. Economy?

The culprit is credit!

Let’s look closer.

Put on your swim goggles and we’ll look underneath the waterline.

What we find is ‘asset-backed’ commercial paper credit is the problem.

I am not referring here to asset-backed commercial notes backed by a large company such as, say, GE or Boeing.

I am pointing to those commercial notes backed by ‘packaged credit assets’ such as consumer-owed mortgages and credit card debt.

Add this fact: More than half of the $2 trillion commercial paper market is now ‘packaged credit assets.’

And, as noted above, with dramatic increases in personal bankruptcy filings due to more and more consumers facing heavy personal credit debt turning to bankruptcy as a short-term fix, investors are getting stuck with heavily eroded ‘packaged credit assets.’

They are scared. They are frozen in place. It is not a pretty picture. Is there more to see? Yes.

Does it start to look better? No.

Indeed, the picture is bleak.

Why?

Foreclosures.

It started with individuals who fell behind and ultimately defaulted on sub-prime mortgages.

Put succinctly, all of these borrowers got in over their heads.

Most often, it is due to high monthly payments reflecting the high interest rates typical of sub-prime loans, plus the usual PMI costs, and more.

Some sub-prime borrowers knew what they were doing and jumped in anyway, chasing the wish of continued increases in housing values.

Some borrowers really didn’t understand and were human prey to unscrupulous un-professionals in, or on the fringe of, the industry.

Add to the sub-prime mortgage segment of the growing number of foreclosures, those borrowers who opted for a so-called ARM (Adjustable Rate) mortgage.

Usually pursued in order to buy a more expensive house with lower initial monthly payments — reckoning day — when the ARM mortgage interest rate ‘adjusts’ comes sooner or later, whether the rate adjusts 6, 12 or more months following closing.

Next, we see the increasing rate of monthly mortgage payment delinquencies, which has been, historically, an advance indicator of potential future foreclosures.

The delinquency outlook is not good. In fact, it is worse than bleak. Note the numbers. They tell the story.

Delinquency data released last week showed foreclosures in July up by 9 percent compared with June.

Ring the Alarm bells.

Look closer and learn that the delinquency rate is up 93 percent over the year before.

Sound the Sirens.

Our economic Ship of State — the U.S.S. Economy — is vulnerable to a growing number of issue ‘icebergs’ adrift in the Seas of World Trade, the Gulf of NAFTA, etc. and any one of them can cause exceptional human suffering for Americans.

The issue iceberg described here is an economic calamity.

It is dead ahead.

(NOTE: See last month’s Financial Dynamics column to review how individual behaviors directly affect the credit crisis.)