Freddie Mac Betting Against Homeowners

• January 31st 2012

by Shilpi Paul

Freddie Mac has made headlines in recent months for a variety of reasons. However, on Monday, a report from ProPublica and NPR put the lending giant in a particularly bad light.

The collaborative investigation revealed that Freddie Mac had essentially placed multi-million dollar bets that paid off if homeowners maintained mortgages with high interest rates, rather than refinancing.

Traders for Freddie Mac had been increasing bets on portions of mortgages called “inverse floaters”, which are backed by interest, not principal. The higher the interest payments on these mortgages, the more Freddie stood to gain. Conversely, if homeowners refinanced, Freddie lost money. Thus, the report concluded that Freddie had a huge incentive to prevent borrowers from refinancing, even when it would save the homeowner thousands of dollars a year.

ProPublica and NPR are the first to investigate the trades of the tax payer-owned mortgage lender. They found that Freddie began increasing the aforementioned bets in 2010, while simultaneously creating rules that made it harder for homeowners to refinance. However, no evidence was found that the two actions were related, as the traders are apparently “walled off” from those that were imposing higher fees and new rules. The Federal Housing Finance Agency (FHFA), who serves as Freddie’s Board of Directors, has the power to approve or disapprove trades, said ProPublica, but doesn’t involve itself with day-to-day transactions.

Since the report was published on Monday morning, reactions have been rippling out. The New York Times reported that the Treasury Department will launch an investigation into the matter, and Freddie Mac also issued a statement in response to the claims:

“Freddie Mac is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates,” it said. The company said refinancing accounted for 78 percent of its loan purchases in 2011.

The FHFA announced Monday that they reviewed the trades last year and were concerned. In the statement, they say that Freddie Mac has already stopped engaging in those transactions, limiting a very small percentage of its portfolio to the “inverse floaters.”

This article originally published at https://dc.urbanturf.com/articles/blog/freddie_mac_betting_against_homeowners/5031.