A lot of the mortgages are securitized and sold to investors – many of them overseas (especially Asian) investors. So sometimes the banks are off the hook. Although I read recently that some banks still have a high percentage (around 40% to 60%) of their asset in mortgages. With mortgages sold, I don’t know who will be responsible for the cleaning up (i.e. foreclosure, etc)…is the mortgages servicing companies responsible? But one potential chain effect is that once the defaults start, then these investors, who once perceive mortgage securities as safe government guaranteed bonds, will price mortgages with more risk — therefore the spread will increase, further driving up the mortgage rates. Now this only happens if the current safety brake, i.e. the mortgage insurance and guarantees fails to cover the full loss. So additional research can be done using mortgage insurance companies’ (PMI,http://www.pmigroup.com/ for example) and Freddie Mac or Fannie Mae’s data. If that safety machanism is breached, then just like the leeve was breached in New Orleans,the consequences will be severe.

If investors start to shoulder a lot of the loss, then we will likely have a credit crunch in residential mortgages, and that will further drive down prices, and hence starts the vicious cycle. Without that credit crunch, the likelihood of rapid steep price decline will be smaller. Don’t know if fed or the government will try to rescue.

And for those of you who are waiting to buy at a good price, better be prepared to come up with cash:-) becasue financing costs will likely be very high when the price is really attractive!