The panic is all about the fact that investors finally figured out that real estate on both coasts is grotesquely overpriced and bears no relation to the underlying salaries of the people who live there. The ARM resets of sub-prime as well as mid-prime lenders means that many foreclosures are yet to come.
A significant increase in foreclosures increases the supply of housing on the market faster than an increase in the demand. This lowers housing prices which makes it more difficult for more people with ARMS to refinance their homes.
Then the imitation of a toilet drain in the housing market continues.
The refinancing boom of the last few years gave consumers plenty of cash to spend in the economy. That cash is no longer available for this year, next year, and perhaps several years after that.
_That_ is why there is panic.
Not only that but as more and more folks found that they bought "at the top" and that they can bail now, get a few months rent free until they are tossed out, and not have 20%$ negative equity, or more, hanging over their heads, they will. Furthermore, as things get worse, the real option for the banks is to renegotiate better payment terms with the delinquent borrower, essentially resetting the value of the loan. The last thing a bank wants is a large portfolio of REO in a sinking market.
So the funds that purchased the CDO's are taking a bath, and they know it. Add to that the default swaps and interest rate swaps and it is all tied together in such a neat package that the damage is systemic.