This provision will make these securities toxic. I think that is the rat plan. The federal government will be forced to buy the loans and subsidize the borrowers. Maybe the federal government can lower the interest rates to 3.4% just like student loans will become under the new student loan bill.
You’re right — no one will touch sub-prime debt. Not that investors were eager to do so in the first place — after all, wasn’t that why they sub-prime ABS’s were rolled into CDO’s with higher-grade debt in the first place?
Now with the death of synthetic debt, pile this on, and what I said on other thread will come to pass: borrowers will need to have gold-plated credit ratings to get a mortgage at all.