by Calculated Risk on 2/18/2007 12:39:00 PM

... the damage of the mortgage mania has been done and its effects will be felt. It is only a matter of when.

From the IHT: Investors in mortgage-backed securities are failing to react to the plunge in the mortgage market. A few excerpts:

It is becoming clear, however, that subprime mortgages are not the only part of this market experiencing strain. Even paper that is in the midrange of credit quality — one step up from the bottom of the barrel — is encountering problems. That sector of the market is known as Alt-A, for alternative A-rated paper, and it is where a huge amount of growth and innovation in the mortgage world has occurred.

And who are the bagholders?

[Joshua Rosner, a managing director at Graham & Fisher & Co., and Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business] find that insufficient transparency in the CDO market, significant changes in asset composition, and a credit rating industry ill- equipped to assess market risk and operational weaknesses could result in a broad financial decline. That ball could start rolling as the housing industry weakens, the authors contend.

"The danger in these products is that in changing hands so many times, no one knows their true makeup, and thus who is holding the risk," Rosner said in a statement. Recent revelations of problem loans at some institutions, he added, "have finally confirmed that these risks are much more significant than the broader markets had anticipated."