Ozzie-
I think the issue is that these loans get chopped up and some bonds are based on the riskiest parts. Those risky bonds are now essentially worthless, and the “good” parts are not looking as good.

But you are very right that many piggingtons and others may overestimate the amount of money being lost. Even if 10 % of all mortgages default, and there is a 75% recovery on those defaulted loans, only 2.5% of the total mortgage value is lost (plus lost interest payments.) Lots of money lost, but not a “crash the banking system” type of problem.

But the bigger issue is the loss of appetite for mortgage bonds. Mortgage companies need to sell their mortgages to make money, and if Wall Street stops buying- or pays less for them- the business model that drove mortgage lending the last few years is over. Lots of those radio station ad re-fi guys will be out of work. And people that need those exotic loans to stay in their houses (or to buy) will have more trouble finding someone to write the mortgage. To me, that the more important part of the story.