They don't have one mil in losses (their loss is the difference between the mortgage balance and the value of the home minus transaction costs associated in selling it), they have one million less credit they can loan out to others. This is why they have reserves, because things go wrong and they need a "safety net" of some sort. This reserve system was never designed to withstand multiple years of flat housing values. It is incomprehensible there would be quarter of quarter losses of any amount, and down 20-40% was beyond unfathomable in the context of the models/structure of the system.
As home values fall, it's self reinforcing, almost exponentially. Steve is probably concerned because he realizes as bad as it currently is, we are nowhere near where we could easily end up.
If mortgages were somehow isolated from the rest of our system, it would be an option to just let those institutions collapse and "wipe the slate clean".
However, these same institutions/investors provide backing and support for every line of credit in existence. By suggesting just letting the bodies hit the floor as I like to put it, you are simultaneously asking for the disintegration of the credit markets.
I've mentioned this before but I don't know if people truly ponder it. If no one would get a sizeable loan, what's the immediate cash value of your assets? That's without taking into consideration the increase in value of cash after credit markets shut down (could be many multiples). This is why the previously mentioned lamborghini owner expects lambo's to become 25% their current market price.
