Agreed, Allan. The issue at hand for housing is the likely fallout from downgrades (aka credit contraction/removal of invstor demand). Certainly is likely to be an acceleration and expansion of fallout once the downgrades get underway.

At this time we’re still talking about a mere sliver of the market, as S&P apparently intends to analyze only $12 billion of the $565 billion subprime paper issued in ’05 and ’06. I believe they will be looking primarily at BBB rated paper (aka New Century, Fremont, etc paper) There’s alot of junk in there and I expect it to be rated as such shortly. The A paper appears high and dry, at least for now.

While I know of no one who knows for sure, the best guestimates that I am hearing suggest that foreign investors are holding the majority of equity and mezzanine tranches in harms way. We see evidence now of pension fund investment in some of this riskier paper, obviously bought to boost fund performance. They will get hurt on these deals but I would be surprised to see more than a few % of a fund’s assets placed in these risky investments, so they’re not going to get wiped out.

At the end of the day, this is not unexpected news, it was going to happen, lender/investors are going to lose lots of money (but how about those folks that are short equity and/or short mezzanine – looking pretty good right about now…) and there’s very likely going to be a decreasing appetite for funding/investing in subprime paper. This is another link in the chain reaction.