My previous link points out other securities (not mortgage related) that add up to many trillions which we will pay. If anyone thinks 700B is it, I have a really nice tract mansion to sell them.
To directly answer your question, once mortgages were bundled and tranched, a relative few defaulting mortgages can destroy the value of the security because the securities were tranched and priced assuming a lot fewer defaults. House prices would rise forever so the securities got default insurance (now defunct) and fraudulent "AAA" ratings (and subsequent high prices).
Then the buyers of the securities used leverage (cheap short term credit) so when the price went down a little they were forced to sell driving down the price to, in many cases, a dime on the dollar.
I read somewhere that back as far as 2005, a penny loss in FNM stock price would cause Citicorp. to lose about 600k, how that works is a bit convoluted but has to do with the credit default swaps, credit lines, and crdit downgrades, the stock price was a symptom not the cause.
The stock price then was 70, now its a buck and change. The investment banks were leveraged anywhere 30 to 70 times.
They collectively now owe more money than exists, probably, so its easy to understand the late unpleasantness.