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The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

According to Stein the max value of foreclosed mrtgages is 250 billion. The other 450 billion is for whom?

And we're asked to bail these guys out.

max value of foreclosed mrtgages is 250 billion. The other 450 billion is for whom?

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.

Listening to them guys up on the hill today they was tryin’ real hard to explain, theys don’t know how to value them things. And that bein’ why they really don’t know how much $$ they really need.

Least that is how I understood them. Was really kind of frightening to listen too.