What I love about this mortgage stuff
This "subprime" mortgage stuff is just the start of it. There are serious, systemic problems with the way consumer debt is packaged and sold to the market. Fannie Mae and CMHC (both government related) play major roles in this - both major debt issuers on a worldwide scale, and the primary forces behind the real estate boom.
Basically through government intervention, sloppy accounting, and a booming derivatives market, issuers of asset backed securities including mortgages have been able to make it look like the debt instruments they put on the market are riskless. One of my close friend worked at a big bank, pricing and modeling these instruments. It's a game to them, just a purely mathematical game. They are very far removed from reality and have few provisions for falling real estate, rising bankruptcies, or unwinding consumer leverage (e.g. underwater).
The market now realizes that the lower grade paper is a disaster, but we haven't seen anything yet. The problems will spread as other debt is revealed to be a lot crappier than the credit rating it carries. In my opinion this includes Fannie Mae MBS. This mortgage crap is stuffed into every bond fund you can find. The iShares short term canadian bond fund (sounds like t-bills right?) is in fact 50% mortgages.
I haven't even mentioned above that the derivatives used to hedge the risk on trillions in debt are themselves questionable - traded OTC with no reliable counterparties. The debt paper is crap, and so is the wrapping used to hold it together and make it look pretty and riskless. I guarantee you, the risk is there and it will show in the pricing eventually.