Economics, Regulation

Left Still Clueless about Financial Crisis

Last week, the left-wing blogs were abuzz with renewed criticism of Ed Pinto’s data on subprime and Alt-A lending. Mike Konczal and Paul Krugman triumphantly displayed a graph from a February 2011 paper by David Min of the Center for American Progress that they claimed as proof that Pinto’s numbers—which I relied on in my dissent from the majority report of the Financial Crisis Inquiry Commission—were fraudulent. The graph is copied below.

Honestly, it’s hard to believe anyone gives these characters the time of day, let alone reads their work. The Min graph is grossly deficient in almost every way possible, and the fact that it would be cited by both Konczal and Krugman confirms their utter ignorance of this subject.

Let’s start with a basic problem. The chart is a fake. It’s mislabeled as coming from the Mortgage Bankers Association (MBA) National Delinquency Survey for the second quarter of 2010, but only the two bars labeled “Conforming” and “Actual Subprime” actually come from the MBA’s survey. The MBA survey includes only three categories—government loans, prime loans, and subprime loans. The survey does not include any of the data in the two bars to the left, labeled “Pinto high risk: Freddie>90 LTV” and “Pinto high risk: Freddie 620-659 FICO.” Accordingly, the data in those two bars had to come from somewhere else, namely Freddie Mac, but is misrepresented as coming from the MBA survey.

There are many other material deficiencies. In fact, just about everything in the graph is deceptive. If this were sales material, Min, Konczal, and Krugman would all be jailed by Elizabeth Warren. Let’s take for example the bar called “Pinto high risk: Freddie 620-659 FICO.” It shows a 10.04 percent serious delinquency rate for these mortgages. The implication is that these are all the mortgages below 660 FICO. But these are not all the mortgages in that category. Min (perhaps) neglected to mention the mortgages below 620 FICO. It turns out that 14.4 percent of those mortgages were also seriously delinquent. So Min has selected one limited group and tried to demonstrate that it is considerably smaller than the delinquency rate on the “Actual Subprime” in the chart. It’s like saying that a mortgage has an loan-to-value ratio of 80 percent, but forgetting to mention that there’s a second mortgage for the additional 20 percent.

Min’s chart is misleading for two more reasons. His argument—dutifully accepted by Konczal and Krugman—was that “Actual Subprime” (which Min never defines but are loans made and securitized by the private sector) had a much higher rate of delinquency than the portion of Freddie’s exposure that was represented by loans to borrowers with FICO scores of less than 660—which Pinto had labeled as “subprime.” This comparison is offered to demonstrate that the loans made by the private sector were worse than Fannie and Freddie’s loans.

But Min doesn’t tell us—perhaps he doesn’t know—that Fannie and Freddie were the largest buyers of these “Actual Subprime” loans, so that many fewer would have been outstanding if Fannie and Freddie hadn’t needed them to meet their affordable housing requirements. In addition, the percentages Min presents are meaningless because he doesn’t tell us the actual numbers of loans involved. For example, if there are 1000 “Actual Subprime” loans and 1 million Freddie loans to borrowers with FICO scores between 620 and 659, the latter are of course going to be more significant in terms of their effect in the financial crisis. Pinto found that what Min labels as “Actual Subprime” (and Pinto calls “self-denominated subprime”) were less than one-third of the total number of all subprime and Alt-A loans outstanding in 2008. If you want to see Pinto’s actual numbers for these low quality loans, compared to Fannie and Freddie prime loans, see Table 3, page 21 of my dissent.

Finally, even if we stipulate that the “Actual Subprime” is a significant number—enough to contribute significantly to the financial crisis—the fact that it might have been of even lower quality than the other subprime loans made by Fannie and Freddie is not relevant to Min’s claims that Pinto made Fannie and Freddie’s loans look worse than they actually were. The loans that Fannie and Freddie acquired—and Pinto identified—were of sufficiently low quality to cause these giant companies to become deeply insolvent. They have already required over $150 billion of assistance from the Treasury just to stay afloat, and their regulator has estimated that their losses may eventually total between $221 and $363 billion. Thus, they were bad enough to sink Fannie and Freddie and drive down housing prices all over the United States.

There is no end of the deceptions that the Krugmans, Konczals, and Mins will cook up in order to avoid the truth: Fannie Mae and Freddie Mac, as required by the affordable housing goals established by HUD, acquired 12 million subprime and Alt-A loans by 2008 and in the process destroyed themselves and triggered the financial crisis.

5 thoughts on “Left Still Clueless about Financial Crisis

  1. If what you are writing is accurate, then what hope is there when the left (and the right, because everyone has an agenda) concocts reports and graphs that the ordinary man on the street will not and cannot decipher and investigate? It seems that everyone is lying to further their own cause, whether that is good for the country or not.

    It seems the best bet, is for the government to get out of the mortgage business and simply serve the role as overseer and regulator (where/when necessary). That way, at least less tax money is not wasted.

  2. You really ought to be more careful before calling others deceptive or not credible.

    In his paper, Min makes clear that he is saying that A PORTION of the loans that Pinto labeled as “high risk” were actually not so–and that is the point he is trying to make with the graph. He also makes clear in the text that his data is coming from Freddie Mac. By ripping his graph from its context and criticizing it in isolation, you misrepresent his work, turning an oversight into a nefarious scheme. Similarly, Konczal says, “That 8.45% and 10% are the ‘other high-risk loans’ that they try and shoe-horn in with subprime.” The use of the phrase “other high-risk loans” indicates that he believes that some of Fannie and Freddie’s loans were subprime, but finds Pinto’s numbers inflated.

    As you know, Pinto takes the most expansive definition possible of “nontraditional mortgages”–including a sizable amount of Alt-A–in order to get the biggest number possible. Then he attributes ALL of the mortgages to federal housing policy, as if there could be no other motivation. Yet executives at Fannie and Freddie had a history of breaking the rules to get higher bonuses, as exemplified by the income management scandal that surfaced in 2003 and 2004–and they didn’t have affordable housing goals to blame for that. The fact that Fannie and Freddie are insolvent does not mean that the affordable housing goals were the cause of that insolvency.

    Furthermore, the fact that “Fannie and Freddie were the largest buyers of these ‘Actual Subprime’ loans” does not mean that “many fewer would have been outstanding if Fannie and Freddie hadn’t needed them to meet their affordable housing requirements.” Fannie and Freddie bought the uppermost tranches of the PMBS, which were easiest to sell, as there were many buyers who were limited by statute to buying highly-rated assets and happy to get a boost of a few basis points on a seemingly riskless return. It was the sale of the equity and mezzanine tranches that were critical to securitization–they provided the signals to the buyers of the upper tranches that somebody thought the mortgages were a good investment.

    Finally, you make much of Min’s failure to reveal to discuss the <620 mortgages, then gloss over the fact that their default rate was HALF that of PMBS. And the fact that PMBS were of worse quality than GSE mortgages is relevant to Min's larger point. If PMBS were of worse credit quality, it would be more plausible to say that they brought down the housing market, and the GSEs with them, rather than the other way around.

  3. This is due to volatility of US dollar. Day by day US Dollar is weakening. Even US Banks are not able to recognise their lender’s capacity, which had lead to them in bid recession. If any body need to take contorl on inflation, needs to leave US Dollar & use other strong currency alike EURO whic is also being used in EU countries. Only importing wapons from USA contry needs to use US Dollar. No body is importing Crude oil, Electronic goods alike mobile phone, TV, Washing machine from USA. So no need to have US Dollar to pay to USA.

  4. If David Min is so disreputable, why did the AEI invite him to speak at its conference on Fannie and Freddie? And why didn’t Wallison address Min’s points at that time?

  5. Well put Mike. It’s kind of painful to watch people dance like that when they get caught making dodgy statements … but the worst part is how willing some people (like Republicans in Congress) are willing to swallow it, simply because it confirms for them what they already wanted to believe.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>