"Unfortunately motrgages of all type (sub-prime, prime jumbo, commercial etc) have been bundled & flogged off to 3rd party "investors" like hedge funds etc who typically leverage up to 10x or higher into the face value of the package. So a 10% drop in face value of the traunche represents a 100% loss of capital if they are leveraged by 10x."
This is a good point 50ftCat, and certainly some (more) Hedge Funds will be going under for betting this way. But not everyone exposed to subprime securities are this highly leveraged, and some Hedge funds are actually doing nicely because they had the foresight to see the problem coming, and bet the other way. So there are going to be winners as well as losers in the wash-up, as well as the merely chastened.
"It isn't hard to see that those sorts of losses (actual or newly feared) has a dramatic effect on the amount of capital available for both new & refinancing."
Agreed -- the real-problem is not whether individual funds or even lenders go under, but whether the whole credit market dries up as an overreaction to the difficult-to-quantify value of the CDOs. That was the percived danger that was scaring everyone to death two weeks ago. But things look quite a bit calmer now.
One of the mooted policy responses so far has been to investigate extending the lending rules for Freddie Mac and so on. Measures like this seem much more likely than the much less targeted interest rate drop (which is why I don't believe we're going to see a reduction in interest rates in the middle of the month.)
"It is particularly so for refinancing (honeymoon or teaser loans) when the value of the property to be refinanced is now lower than the amount that needs to be refinanced."
Yes, but the thing is, if you are on a prime 30 year fixed rate mortgage, there is no pressure to refinance -- you just sit pat.
But obviously it's not a good thing if prime customers can't get a mortgage if they want to move house, for example -- I think there will be concerted and directed policy interventions (such as the FMAC legislative reforms) to mitigate such flow-on effects.
We all agree there is a problem in subprime world, but the real question is "how big"? My take is not nearly as big as the more extreme panic merchants would suggest.
But a certain amount of fear and irrationality is good. It's what's making me money in the markets at the moment... I (selfishly) hope for a few more chills and spills on the roller coaster before the ride is over. They're called "buying ops". ;-)
(20min delay)