[Royal Wulff]

Here’s my math:

$12 trillion in mortgages

5% in trouble = $600 billion

95% are performing and banks are making, say, 5.25% PER YEAR in interest on the outstanding principal = $598.5 billion in interest revenue made EACH YEAR by the lenders.

Difference = $1.5 billion

They leant the money. They charge interest to cover their risk. The interest made in one year completely covers their losses if the 5% of bad mortgages are utter losses.

[magellan]

"95% are performing and banks are making, say, 5.25% PER YEAR in interest on the outstanding principal = $598.5 billion in interest revenue made EACH YEAR by the lenders."

You are not including the decline in the value of the collateral asset (i.e., the house).

Mortgage lending at 5.25% APR is a loosing proposition if housing prices are declining by 10% a year.