Commercial-finance firm CIT Group said it’s in trouble yesterday, having had to tap more than $7 billion in emergency loans from its backup credit line, and forced to sell off up to $7 billion in assets. After its credit ratings were cut a few days ago, the century-old company, which has $83 billion in assets, hasn’t been able to get the short-term debt that had been no problem just weeks ago. Its shares fell as much as 45 percent before settling down 17 percent.

The New York Times on C3 says it illustrates that “the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies,” though it sort of contradicts that thesis a couple of paragraphs later by noting that CIT, unlike banks or Wall Street (as of this week) can’t borrow from the Federal Reserve.

CIT’s bonds plunged and the price of insuring against its default soared, Bloomberg reports. The wire service notes that the company’s four big emergency lenders can’t be happy with having to lend to the struggling CIT. That ties up much-needed capital in a firm markets are increasingly betting won’t make it.

C it stumble

The Wall Street Journal’s Heard on the Street column on C1 says “Main Street is about to feel another tremor from Wall Street” as CIT is forced to dial back its lending.

The funding squeeze is likely to make it harder and more expensive for businesses of all sizes to borrow from CIT. Given CIT’s large size, shrinking the amount of available credit also could drive up borrowing costs for companies generally.

“It’s a ripple effect,” says Michael Taiano, an analyst at Sandler O’Neill & Partners. “CIT gets squeezed, the people they lend to get squeezed and end up maybe defaulting on their loans. It kind of goes down the food chain.”

CIT’s problems are the latest sign of tightening credit for small and medium-sized businesses. Mounting defaults on mortgages and other consumer loans have made many banks increasingly cautious about all types of lending, a trend that threatens to aggravate the U.S. economy’s slowdown. A Federal Reserve survey in January showed that about a third of banks had toughened standards on commercial loans, while about 40% said they were charging higher interest rates on such loans.

The papers note the firm could be forced into a distressed sale.

Little banks, big problems

The Journal reports on page one that small homebuilders are getting nailed and threatening to spread the effects of the housing bust to the small and medium-sized regional banks that lent to them.

Muscled out of the mortgage business by large national lenders, many of these banks flocked to construction lending as the housing market boomed. Though these institutions were generally less exposed to the subprime-backed securities that have generated billions of dollars in losses for national banks, they are the front-line casualties when builders and developers can’t make their payments.

The WSJ quotes an analyst saying the current estimate of about 150 bank failures through 2011 could be far too conservative. Delinquency rates on single-family home construction loans are at a huge 7.5 percent, nearly quadrupling the pace of a year ago, and a number the paper says is likely to get worse. A trade group says as many as one in five homebuilders in Atlanta is delinquent on payments.

The upshot?

Analysts worry that losses from home-construction loans could contribute to a possible credit squeeze in small towns and cities across the U.S. “You are going to see a contraction in lending not just for construction, but for auto loans and credit cards,” says Gerard Cassidy, a banking analyst at RBC Capital Markets. “In our view, it’s the big shoe to drop on the banking industry this year.”

When the housing market emerges from its fetal position in what’s likely to be years from now, the WSJ says the homebuilding industry will be more consolidated, dominated in major markets by national companies like Toll Brothers and Pulte Homes, which have more of a cash cushion.

Recession, from sea to shining sea

The NYT leads its front page with a look at signs of recession across the country as the financial crisis spreads to the economy. There’s nothing particularly new here except for a couple of anecdotes, one of which provides our Quote of the Day.

In Oklahoma City, Aunt Pittypat’s Catering has lost one-fifth of its business in the last two months, as $25,000 weddings are scaled down to smaller affairs.

“People are just being a lot more conservative,” said Maggie Howell, a co-owner. “They want crab and seafood, but they’re settling for cheese displays.”

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.