A little light reading

There's a flood of new information and insight into the credit crunch at your fingertips this week, and most of it is quite troubling. Here's a list of recommended reading for those who prefer to get their information direct from the source:

Leveraged Losses: Lessons from the Mortgage Market Meltdown. Mortgage credit losses will hit $400 billion -- about half of that on the books of  leveraged financial institutions including commercial banks, thrifts, hedge funds, and Fannie Mae and Freddie Mac. That will will lead to a contraction in domestic lending of $1 trillion, and trim economic growth by a staggering 1.3 percent, according to this authoritative paper by experts at Morgan Stanley, Goldman Sachs, the University of Chicago, and Princeton.

If you find the paper a bit of a slog, check out Federal Reserve Governor Frederic S. Mishkin's insightful -- and easy to understand -- critique of the study here.

On a related note, William Poole, president of the Federal Reserve Bank of St. Louis, talks about the possibility that Fannie Mae and Freddie Mac will require a bailout ("I do not have any information on the GSEs that the market does not also have," Poole says. "Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious problems.")

Monetary Policy Report to the Congress. This is the annual report to Congress by the Board of Governors of the Federal Reserve System. Nothing you haven't heard about the housing sector before, but this report will help you step back and look at the big picture. Here are factors the Fed is thinking about when it makes monetary policy decisions -- including employment, inflation, corporate profits, financial markets, and consumer spending [check out the graph on the personal savings rate on page 9 (page 13 in Adobe Acrobat). Good luck coming up with that bigger downpayment, would-be homebuyers. ]

Testimony by Mark Zandi, chief economist for Moody's Economy.com, before the House Financial Services Committee this week. Check out Zandi's analysis of Equifax credit files, which leads him to conclude that first mortgages are defaulting at the rate of 2.2 million a year. Even if loan servicers step up the pace of loan modifications, Zandi projects "well over" 3 million mortgage defaults in 2008 and 2009. Two-thirds of those will end up going all the way through the foreclosure process, Zandi predicts. That's 2 million foreclosure sales, or 1 million a year (considerably more than my back-of-the-envelope estimate the other day of  648,000 which relied in part on an assumption by loan servicers that only one in three foreclosure starts will ultimately complete the process).

This was a two-day hearing. Check out all the testimony from day one here, and Fed chairman Ben Bernanke's testimony on day two here.

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