Wednesday, November 7, 2007

Brookings tries to explain away subprime worries and cheats

Cutting some evidentiary corners, and looking past the CDO valuation issue for the most part, is an easy way of doing that. Take this bit of playing with the facts:

[A]mong all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

So, the study simply ignores 2006 and early 2007 data on subprime loans, despite the sudden increase in the percent of loans being subprime ones in 2004-05.

Brookings also claims the problem is confined to subprimes, when the number of defaults in the loan class above them, Alt-A, has also been increasing.

And, it claims there is no credit crisis even while admitting that CDOs and other mortgage securitizations have risk that it says, in not so many words, wasn’t priced to market.

The Brookings report is either ignorant or willful on the economic issue that lending institutions don’t know how many of these instruments could go bad, therefore don’t know how much money they’ll have to tie up to account for them.

It also has nothing unfavorable to say about Fed rate cuts.

The only thing I found myself in agreement with was no bailout for borrowers. On the other hand, it didn’t say anything against a bailout for lenders.

In other words, it sounds like it was written by two Wall Street bulls with connections to financial institutions.