Faltering credit markets have tipped over into a new, more dangerous phase, and everyone from municipalities trying to get sewers fixed...

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NEW YORK — Faltering credit markets have tipped over into a new, more dangerous phase, and everyone from municipalities trying to get sewers fixed to people shopping for a car loan will be paying the price.

On Thursday, Alabama’s most populous county teetered on the verge of what could become the nation’s largest municipal bankruptcy.

A pair of major financial companies said they received default notices from banks nervously looking for loan payments. Reports swirled that Europe’s biggest bank unloaded $24 billion of opaque mortgage securities in a fire sale.

Those on the front lines — from bond traders to investment managers — say the latest batch of bad news indicates a harrowing new time in the credit crisis that could send a shock wave through the economy.

“We are in historic scarier-than-all hell territory,” said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. “I am hearing many people say that the market is more broken now than it ever has been.”

Problems are popping up on multiple fronts and all have different implications.

The $2.6 trillion municipal-bond industry has not been seriously jolted since Orange County, Calif., filed the biggest government bankruptcy in U.S. history in 1993.

Now, the industry faces a host of threats that could limit the way cities and school districts raise money.

Alabama’s Jefferson County is considering a bankruptcy filing to resolve a financial crisis surrounding $3.2 billion of sewer debt. The county — the state’s financial center with Birmingham as its seat — is in talks with banks to work out a solution to its liquidity crisis.

Meanwhile, the insurance that cities bought to protect their bonds is losing its luster.

Ratings agencies worry a rise in defaults on bonds backed by riskier debt would cost insurers so much that they would no longer be worthy of their highest ratings. Such ratings are essential to keep bond insurers in business.

Even a plan by Ambac Financial to raise $1.5 billion to maintain top-notch credit ratings might not help it generate new business and alleviate investor fears.

“The problem now with insurance products is their value is only as good as the perceived view on the insurer,” said Richard Tortora, president of Capital Markets Advisors, which advises Northeast municipalities.

Those negative perceptions could last for years, he said.

It demonstrates that credit markets face a new round of tightening, hitting parts of the market deemed relatively safe only months ago.

Thornburg Mortgage and a bond fund run by an affiliate of the Carlyle Group said lenders are demanding more money on finance lines. The requests, called margin calls, have yet to be fully met by each company.

Thornburg said it has received one default on the lines so far. That sparked cross-default on others as well, the company said. Analysts fear bankruptcy looms.

Carlyle disclosed it, too, has received one default notice and expects at least one more. It did not disclose the size of the default, but the news raised fears other private equity firms could run into similar problems with their affiliates.

Meanwhile, Swiss bank UBS did not comment on reports, including one from JPMorgan Chase, that it may have sold a massive portfolio of securities backed by Alt-A loans at a sharp discount.

That discount — as much as 30 cents on the dollar — would influence the valuation of similar securities held by other financial institutions.

Many of the largest investment banks are due to report results in two weeks, amid fears of big new write-downs.

The troubled Alt-A loans go to customers with minor credit problems or who lack the documentation to get a prime loan, while subprime mortgages go to customers with poor credit history.

Paul Lueken, president of 1st Advantage Mortgage in Lombard, Ill, said people who can document their income and have sterling credit can still line up mortgage loans. The loans just cost more.

In the past few weeks, the “spread” of a home loan’s interest rate over the interest rate on a Treasury bond — a key measure of the cost of a mortgage — has spiked to a 25-year high.

“We’re getting into a much more restrictive underwriting environment,” said Lueken, president of the Illinois Association of Mortgage Professionals. “The cost of getting a mortgage for everyone is going up. … What we hear is everyone pricing more risk into these loans.”

Associated Press business reporters Stephen Bernard, Dan Seymour and Leslie Wines in New York contributed to this story.