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  • Who Does Paul Krugman Think He's Fooling?

    Commenting on the Fannie Mae and Freddie Mac mess, Paul Krugman asserts in his column today:

    Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

    Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

    Where to begin? First let’s stipulate that Fannie and Freddie never did “any subprime lending” … but not for the reason Krugman states. Freddie and Fannie never do any lending: They buy mortgages from lenders only, so that those lenders have more cash to make other loans (like subprime ones). But Krugman is either lying or being intentionally obtuse when he says “Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.” The Washington Post reports:

    In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.

    In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low “teaser” interest rates and ignoring borrowers’ qualifications.

    HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

    That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.

    But by 2004, when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

    For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.

    “That was a huge, huge mistake,” said Patricia McCoy, who teaches securities law at the University of Connecticut. “That just pumped more capital into a very unregulated market that has turned out to be a disaster.”

    In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

    Let’s review that last paragraph again. Krugman is trying to convince his readers that Freddie and Fannie are only innocent bystanders in the housing bubble. Fannie and Freddie purchased 44 percent of the subprime securities in 2004. Does that sound like the behavior of an innocent bystander to you?

    Posted in Ongoing Priorities [slideshow_deploy]

    8 Responses to Who Does Paul Krugman Think He's Fooling?

    1. Pingback: Right Voices » Blog Archive » Who Does Paul Krugman Think He’s Fooling?

    2. Pingback: Fannie-Freddie Knee-Deep in Subprime Mortgages » The American Mind

    3. Pingback: Fannie-Freddie Knee-Deep in Subprime Mortgages |

    4. Pingback: Misty watercolor memories: When Krugman was right | NewsMesh

    5. Smith says:

      You and a lot of writers don't make the distinction between subprime backed securities and individual subprime loans.

      Subprime backed securities are not loans. They're securities.

      The loans used to back those securities were NOT underwritten and guaranteed by Fannie and Freddie.

      Loans underwritten by Fannie and Freddie, bundled and sold as securities were NOT the problem.

      The ones that WERE the problem were put out on the market by private mortgage lenders with an inexplicable triple A rating, where a lot of institutions including Fannie and Freddie bought them.

    6. Kamau Crawford says:

      when trying to blame the financial crisis on Freddie & Fannie…(which they then try to link to the devastation that happens when you give poor people equal opportunity to capital) there is a conceptual problem that the conservatives choose not to address…which is…

      the entire subprime mortgage market totals "only" 1.3 trillion (about 2%) of our nation's household net worth…Credible estimates for the losses incurred owing to subprime loans and the next riskiest class of loans, "Alt-A" together total about 300 billion…How could that amount devastate the world economy? or look at it this way..If the potential high-risk mortgage defaults totaled only 300 billion, then surely the trillion-dollar federal bank bailouts would have covered the entire problem…and then some..but they didn't

    7. Pingback: Morning Bell: Seize This Opportunity | The Foundry: Conservative Policy News.

    8. Pingback: Morning Bell: The Left’s Crony Capitalism Explodes | The Foundry: Conservative Policy News.

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