Report: Freddie Mac bets against homeowner refinancings

NPR and ProPublica investigation shines light on investment practices

In 2010 and 2011, mortgage giant Freddie Mac invested billions of dollars on bets that homeowners with high-interest mortgages would not be able to refinance at today’s lower interest rates, according to a joint investigation conducted by NPR and ProPublica, a nonprofit, independent news agency.

While legal, the bets appear to be in direct conflict with the taxpayer-backed company’s public mission, as stated on its website, "to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing," the news agencies said, noting that refinancing terms have been getting more restrictive of late and include higher fees and new rules that prevent some homeowners from taking advantage of historically low interest rates.

Freddie Mac is regulated by the Federal Housing Finance Agency (FHFA). Officials at both Freddie Mac and FHFA repeatedly declined to comment on the specific transactions, the news agencies said, though Freddie Mac did say that its employees who make investment decisions are "walled off" from those who determine the terms under which homeowners can get loans.

And in a written statement, Freddie Mac said it "is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates," noting that it refinanced loans for hundreds of thousands of borrowers in 2011, according to the news agencies’ report.

HousingWire writer Jacob Gaffney accused NPR and ProPublic of conducting a "witch hunt" of Freddie Mac.

"Who in their right mind would try to counter NPR and ProPublica articles that clearly depict the evil mortgage market behemoth undercutting homeownership initiatives and doing the unthinkable: Trying to earn money for bond investors?" Gaffney said.

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"Hate to say it NPR and ProPublica, but the same thing is happening at Ginnie Mae and Fannie Mae, and just about everywhere a home is bought, sold and financed."

He added, "The very federal conservatorship status that both Fannie and Freddie are under is designed to protect their assets. That means keeping performing loans right where they are — in a position that most efficiently monetizes loans for investors" — one of the biggest of which is the U.S. government, he said.

ProPublica characterized the investments by Freddie Mac as a conflict at the heart of the company: "In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance."

Freddie Mac, as does fellow government-sponsored enterprise Fannie Mae, repurchases loans from lenders, allowing them to keep making more loans with minimal risk. The report by NPR and ProPublica contends that in 2010 and 2011 Freddie Mac didn’t just repurchase and hold loans, however — the company reportedly also packaged hundreds of thousands of loans, chopping the securities up into two main slices:

1. One that is low-risk, and based on homeowners paying the principal on their mortgage.

2. The other, known as an "inverse floater,"  that is higher-risk and based on all of the interest owed on the entire bundle.

Freddie Mac would sell the low-risk slice and keep the higher-risk slice, the news agencies said.

"That riskiest investment pays out a lucrative stream of interest payments. But Freddie’s slice also has all the so-called ‘prepayment risk’ associated with that (bundle) of loans. So if lots of people ‘prepay’ their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can’t refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments," NPR said.

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