Uh-Oh, Bernanake May not be Reconfirmed as Fed Chair

http://www.youtube.com/watch?v=XOYAuk809fY&feature=player_embedded#

http://www.realclearmarkets.com/articles/2009/11/10/how_did_paul_krugman_get_it_so_wrong_97499.html

maybe we pass on krugman..

In July 2008 Nobel laureate Paul Krugman wrote that Fannie Mae and Freddie Mac (the GSEs) "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." (New York Times, July 18, 2008)

Krugman could not have been more wrong in his assertions. Somehow he missed Fannie and Freddie's acquisition of $4.3 trillion in subprime, low down payment (5% or less) and Alt-A loans. How about the $2.7 trillion of CRA loans? After accounting for overlap among these groupings, he somehow missed some $5 trillion in such loans, trillions of which remain to plague the nation's economy.

Details:

Let's start with the assertion that GSEs only buy mortgages made to borrowers with substantial downpayments. While it is generally accepted that a substantial down payment would be 20% or more of a home's value, let's be charitable and call a down payment of 10% or more substantial. Over the period 1992-2007 Fannie and Freddie acquired $1.3 trillion in home purchase loans with a 5% or less, amounting to 62% of all such conventional loans originated nationwide over the same period. These loans are now defaulting at 7-8 times the level of the GSEs' traditionally underwritten loans with <=90% LTV. Fannie started buying loans with only 3% down as early as 1994 and by 2000 Fannie was buying loans with no downpayment.

How about Krugman's claim that the GSEs didn't do any subprime lending? Over the period 1997-2007 they acquired a total of $2.2 trillion in subprime loans and private securities backed by subprime loans. Conventional subprime loans came in two "flavors". The first group consisted of loans with a FICO score of less than 660 (a regulatory definition of subprime), loans which Fannie now says are similar to subprime loans in risk but have not been classified by it as subprime. The GSEs acquired $1.5 trillion of this type of subprime loan. These loans are now defaulting at 8-9 times the level of their traditionally underwritten loans with a FICO >=660. A second group consisted of private mortgage backed securities backed by subprime loans denominated as such by the originator. The GSEs acquired $700 billion of these securities, amounting to 33% of all such privately issued subprime securities. The loans backing these securities are now defaulting at 18-19 times the level of the GSEs' traditionally underwritten loans with a FICO >=660.

How about his assertion that the GSEs' loans were carefully documented? Over the period 2002-2007 they acquired $773 billion of Alt-A loans and private securities backed by Alt-A, amounting to 55% of all such loans originated nationwide over the same period. These loans are now defaulting at 9-10 times the level of the GSEs' traditionally underwritten loans.

These three loan types helped the GSEs meet their affordable housing (AH) mandates under the "Federal Housing Enterprises Financial Safety and Soundness Act of 1992" (GSE Act). They were materially assisted in this effort by big banks and thrifts originating trillions in high risk loans to meet another mandate established under the federal Community Investment Act (CRA).