Thanks, GD. I read the Gillian Tett piece (“MBS pricing for dummies”?) Gillian’s comment was that the house price drops consistent with 30% losses on the AAA tranches of MBS are unlikely. But if the AAA tranches are 75% of the total MBS, then a 45% drop in prices would do it. For MBS’s issued at the peak of the bubble, the underlying home prices may well average 80% more than their long-term trend values. It’s only unthinkable if you ignore the possibilities implied by Shiller’s long-term inflation-adjusted home price charts.
