Without a secondary mkt how do Banks recapitalize to make more loans?
But that just means those property values never should have been so high in the first place. They were just artificially inflated by the increasingly lax lending terms that have been extended to homeowners over the last few decades.
All this is true and the incredibly low interest rates, with little or no money down pushed prices up. Until the pricing drops to 35-38% of gross income for PITI the pressure will be down. However, once the pricing for residential real estate returns to it's natural level it won't matter if Banks can't sell their loans to recapitalize.
An interesting point about CMOs is that one of the underlying forces behind the development of the CMO concept was the major demographic change in the U.S. that took place during the 1960s and 1970s. The original purpose of the CMO was to provide a mechanism for banks in the Northeast and Rust Belt states (where banks had large deposits and the demand for new housing was lower than other parts of the U.S.) to effectively extend mortgages to home buyers in the Sun Belt states (where demand for new housing was high but banks didn't have sufficient deposits to cover those loans).
So the CMO, in effect, was originally designed to abrogate state banking laws!