If foreclosure is so rare why is it a huge problem?

If you sum this over the five or so years expected for this crisis, thats like ten percent of households. In some minority neighborhoods its at will be almost half of all houses.

The dollar losses of foreclosures are not what nearly brought down the financial system.

Various large financial companies had highly leveraged positions, based on the value of mortgages. The figure I have heard bandied about is 30 to 1 average. This put fatal strain on balance sheets - a lack of capital, or a liquidity crisis. Linked positions also changed dramatically. In chain reactions, companies such as AIG were liable for CDS they had written.

To aggravate matters, these positions were not disclosed. This created a crisis in confidence, no one wanted to lend, and money stopped flowing. That is what nearly brought down the financial system - it stopped financing. Lies compounded upon lies. Even money market funds became suspect, and T-Bills became the safe haven.