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Tess Vigeland: Time for your daily subprime mortgage mess update. The housing slump is now being called the worst in 16 years. Sales of existing homes fell in 41 states, according to the National Association of Realtors. There's word today that the subprime meltdown is spreading to small banks, not just the big national ones.

To release the pressure valve, some in Congress and the mortgage industry want the government to allow Fannie Mae and Freddie Mac to buy up bigger loans. So far, no deal. Stacey Vanek-Smith reports on how that's affecting potential home buyers in some of the country's most expensive housing markets.

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Dan Arguelles: This is a master bathroom, it's got a Jacuzzi tub with a fireplace . . .

Stacey Vanek-Smith: Real estate agent Dan Arguelles shows off the finer points of a six-bedroom home in Manhattan Beach, Calif. The asking price is $2.7 million.

For most of us, buying it would mean taking out a jumbo loan. That's anything larger than $417,000. Last week, interest rates for the average jumbo mortgage jumped a quarter of a percent. Rates for smaller loans barely budged. Funny thing is, almost no one defaults on a jumbo loan.

Housing market economist David Lereah explains why lenders are punishing the good:

David Lereah: The lender community got caught with their financial pants down, and now they're afraid to make the loans. A lot of households that do have the financial wherewithal to purchase the homes are now unable to do so.

Mortgage lenders can sell smaller loans to Fannie Mae and Freddie Mac and pass the risk to the federally-backed agencies. But when loans top $417,000, Fannie and Freddie can't buy. The government put restrictions in place last year, when regulators worried Fannie and Freddie's shaky accounting and multibillion-dollar debts were putting the economy at risk.

Now private lenders worry they won't be able to resell jumbo loans. That's a serious problem in cities like Los Angeles, where the median home price is well above half a million dollars.

Mitch Ohlbaum: People are very interested in buying, people still want to buy. The problem is, can you get them financed?

L.A. mortgage broker Mitch Ohlbaum says jumbo loans make up about 95 percent of his business, and many of his clients are middle-class buyers. Ohlbaum says just last week, a lender offered his client one rate and then suddenly jacked it up by 1 percent — a difference of thousands of dollars a year.

Ohlbaum: And I'm not happy with the rate. He wants to buy the house. He's been renting, he's been saving, he's been doing everything he was told to do. He has immaculate credit, he has money in the bank, and this should not be a problem for a guy like him. Somebody like that is probably not going to be able to buy a house because of this.

Ohlbaum says more than 10 percent of his deals have fallen through in the last few weeks — up from less than 1 percent. He says many people just can't get the loans they need. The same thing is happening in New York, Boston and San Jose.

But if you're living in an area where homes are less expensive, should you care? Columbia Business School's Chris Mayer says yes.

Chris Mayer: You know that things are in trouble when healthy businesses and healthy borrowers can't get credit. This means that people who can and should be doing business won't be. When credit markets start to be a hindrance in the economy, you know, that's when things are really a problem.

Mayer says a lot of the priciest real estate markets — like Silicon Valley and New York City — are major economic engines for this country. He says if people there stop being able to buy and sell homes, they'll stop buying and selling other things. And, he says, that would have one jumbo impact on the U.S. economy.

In Los Angeles, I'm Stacey Vanek-Smith for Marketplace.