Both of these come from Dr. DeLong’s blog.

First is a set of documents that show how Fannie Mae realized the risk involved in making adjustable rate loans and participating in the market for them created by the private sector.  Instead, Fannie Mae wanted to redirect the market toward fixed rate loans, which they had an advantage in selling, and to discourage the use of the home as an ATM.

Second, is a little Supply/Demand sort of discussion about how when the price of something drops, if it is because of increased supply, the quantity sold will increase.  If it is because of decreased demand, the quantity will also decrease.

So, knowing this, we should be able to look at a time-plot of the market share of GSE-originated loans and private sector loans, notice which way the “quantity” curve moves (up or down) and that will tell us if the crash (price drop) is a supply issue or a demand issue.  Looking at just such a graph (and reading Dr. DeLong’s explanation, which comes from Milton Friedman!), we see that in fact as price went down, quantity went down, leading us to conclude that:

This means that the dominant feature of the mortgage market in the 2000s was not an expansion of supply by Fannie Mae and Freddie Mac pushing their implicit government guarantee past the limits of prudence, but was a reduction in demand for Fannie Mae and Freddie Mac’s products as private-sector mortgage lenders aggressively pursued and took away their markets.

• Only 12% of the CRA-Made loans were sub-prime (29% of non-CRA-regulated loans were sub-prime)
• CRA-made loans were half as likely to go into foreclosure than non-CRA regulated loans made in the same geographic areas
• Of all the sub-prime loans made, 60% went to medium-to-high income borrowers or non CRA geographies.

On the other hand, deregulation of the finance industry encouraged banks, including Fannie Mae and Freddy Mac, to purchase non-CRA sub-prime loans from CRA geographies so they could count toward their CRA requirements.  In this situation, you have the unregulated origination, re-packaging, and resale of sub-prime loans where due diligence is discouraged and moral hazard is encouraged. It’s one thing for a bank to evaluate the income and risk of an individual and choose to lend to low income borrowers who can pay the loan back.  It’s another thing to make such loans without doing due-diligence since you know you’re just going to re-package and sell it off, making it someone else’s problem.

It’s a failure of regulation, not a crisis of lending to poor people.  Even illegal immigrants are less likely to default on their loans than the average US Citizen.

Peter Kraus

Peter Kraus worked at Goldman Sachs for 3 months as head of strategy.  But, after the Bank of America takeover, his contract terms changed and he was able to take a $25M golden parachute… paid for, in part, by your tax dollars in the form of $25Bn in TARP funds given to BoA. Now he’s gone and bought a $37M NYC apartment.

I think we need a new term to describe these people.  One I’ve heard and like is Corporate Welfare Queen.  I can’t even afford a $3M NYC apartment.  Why should my tax dollars pay for this man, who probably has zero kids, to drive around in some stretch Cadillac up and down the streets of Manhattan, while he sits at home and collects a check in the mailbox paid for by my tax dollars!  He should be out there being a productive member of society instead of wrecking it with disastrous banking policies and rap music.  I manage to hold down a job, he should too.  It’s not my fault his bank merged and eliminated his job.  He should have thought of that when he decided to get an MBA.

Story here and here.