The the authors probably didn’t do, it seems to me, is to estimate the impact of a downward spiral — foreclosure leads to lower price, then leads to more foreclosure. So I believe that it’ll be worse than the authors estimated. How fast will it happen? It seems that sub-prime loans enter problematic period fast, about a year. Then if refinancing is shutdown due to tighter lending, we’ll likely see real damage later this year and all of 2008.
As far as cost — the fortunate part is that they’re more dispersed among investors of securitized mortgages, plus a few direct actors like NEW. I don’t think that the cost of debt default will be a direct hit to taxpayers. But the cost of asset (housing) deflation to the economy is another matter.
