---

Krugman’s Fannie Mae Fantasyland
...First, he argues that the bad lending was done not by banks covered by CRA, but by non-banks that were exempt from CRA. Now in Krugman’s defense, there is a grain of truth to this. For instance, up until its purchase of a thrift, Countrywide, the largest subprime player, was not covered by CRA. However, comparing Countrywide to say Bank of America, which was covered by CRA, misses a crucial point: these non-CRA lenders were selling their loans to Fannie and Freddie, who were getting housing goal credit for those loans. For instance, 25% of Fannie’s whole loan purchases were from Countrywide. So rather than, as Paul claims that CRA didn’t matter, what the comparison shows is that the GSE housing goals were more damaging than CRA....

...What evidence he does offer is to show that during the boom, the percent of the market that was securitized by Fannie/Freddie fell, while the percent securitized by the private-label market increased. Krugman has that fact correct, yet he misses a critical point. That increase in private-label securities was being funded/purchased by Fannie and Freddie.

As my chart illustrates, the more involved were Fannie and Freddie in purchasing subprime MBS, the more the subprime market grew. During the bubble years, Fannie and Freddie were the largest single source of liquidity for the subprime market. And the chart doesn’t even take into account all the subprime whole loans being purchased by the GSEs....