(2) Appraised values will plummet. A house already in foreclosure will be unsaleable at any price, at least for the short term. (Here is my theory, published last Saturday, October 2, 2010, speculating why.) Appraisals work on comparable sales and often account for extenuating factors to adjust estimated values up or down. A foreclosed, unsaleable home may have an effective current price of zero -- as it cannot be sold at any price if the buyer requires a mortgage and cannot get the requisite title insurance to satisfy a mortgage underwriter. The appraisal may not necessarily use the implied zero price, but will likely have every reason to apply a steep discount to all other data that would have been used previously. How much of a decline in appraised values do you expect? 10%? 20%? 50%?
(3) A new capital crisis. What happens when banks finally mark to market the value of the mortgages they hold on all of these underwater -- and now, going to be much more underwater-- homes? This will drive down the banks' balance sheets (reducing assets) and put pressure on them to raise real capital. Think the banks were hoarding cash before? Think it was tough getting a loan before? You ain't seen nothing yet.