The Volokh Conspiracy - Krugman Error on Fannie and Freddie.--

Over at the Foundry, Conn Carroll is pointing out an apparent error in Paul Krugman's defense of the political entities doing business as Fannie Mae and Freddie Mac.

Krugman wrote in his column today that "Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago" and that "they didn't do any subprime lending."

Conn Carroll responds:

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. …

In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion — 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent.

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?

	[Jim Lindgren, July 14, 2008 at 3:49pm] Trackbacks Krugman Error on Fannie and Freddie.-- Over at the Foundry, Conn Carroll is pointing out an apparent error in Paul Krugman's defense of the political entities doing business as Fannie Mae and Freddie Mac. Krugman wrote in his column today that "Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago" and that "they didn't do any subprime lending." Conn Carroll responds: 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. … In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion — 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. 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?