Journalism in the Public Interest

Bets Against Homeowners Must Stop, Freddie Mac Was Told

After an examination by its regulator, Freddie agreed not to make new investments that profited from homeowners staying trapped in high interest-rate mortgages. But Freddie has kept billions worth of those investments.


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This story was co-produced with NPR News.

Freddie Mac agreed last month to stop making new bets against American homeowners after its regulator, the Federal Housing Finance Agency, raised concerns, according to a statement the agency issued late Monday. Freddie, the taxpayer-owned mortgage giant, still retains $5 billion worth of such bets.

The agency, responding to an investigation by ProPublica and NPR, said it had "identified concerns regarding the controls, including risk management, surrounding the inverse floaters," as the investments at issue are known. The agency did not specify what it had found, but said Freddie agreed in December that "these transactions would not resume pending completion of [FHFA's] examination work." The statement also said that Freddie had ceased making the deals earlier in 2011 but did not explain why.

Separately, the White House said the Department of the Treasury is "looking into" Freddie's investments, and at least three senators called on Freddie not to bet against struggling homeowners.

The mortgage-insurance company bought billions worth of complex mortgage-backed securities that profit if borrowers stay trapped in high interest rate home loans. The $5 billion figure released Monday afternoon is more than had been reported in the ProPublica-NPR investigation.

In late 2010 and early 2011, Freddie began dramatically increasing these multibillion-dollar deals. At the same time, Freddie also made it harder for homeowners to get out of their high-interest mortgages and into more affordable loans that could save them thousands of dollars a year. No evidence has emerged that these decisions were coordinated at the company, and Freddie has denied that they were.

But the deals highlight a conflict of interest: While Freddie's charter calls for the company to make home loans more accessible, the company also has giant investment portfolios that could lose large amounts of money, at least in the short run, if too many borrowers refinance into more affordable loans.

At a press briefing today, White House spokesman Jay Carney was asked whether Freddie Mac's investment strategy contradicted President Barack Obama's stated commitment to make homeowner refinancing more affordable. In his response, Carney stressed that the president does not directly control FHFA.

"This is an independent institution with independent governance, so we don't make those kinds of decisions," Carney said.

Meanwhile, Sen. Bob Casey, D-Pa., sent a letter to the White House today demanding an explanation of the Freddie Mac investments. Referring to the head of the company, the senator wrote, "I question the leadership that would position the government-backed organization to bet against homeowners."

Sen. Casey wants the administration to "exercise influence over the FHFA, and make sure that Freddie is not making these kinds of bets," his spokesman said.

Sen. Johnny Isakson, R-Ga., said in an interview that if Freddie "bet on keeping everybody in the loans they're in, and not allowing them to refinance, that would be wrong. Particularly for those people that are qualified to refinance." And Barbara Boxer, D-Calif., fired off a letter to the acting director of the FHFA expressing "outrage" over Freddie's deals.

In its statement today, the FHFA confirmed that Freddie, in making these investments, retained significant risks. When Freddie was taken over by taxpayers in 2008, Freddie Mac entered into an agreement with the U.S. Treasury to reduce the company's investment holdings. The inverse floater deals leave "Freddie Mac with a portion of the risk exposure it would have had if it simply held the entire set of mortgages on its balance sheet," the FHFA said.

In fact, mortgage experts said that inverse floaters burden Freddie with new risks. With these deals, Freddie has taken mortgage-backed securities that are easy to sell and traded them for ones that are harder and possibly more expensive to offload.

ProPublica and NPR found $3.4 billion of Freddie's inverse floater deals, and their value is based mostly on interest payments on $19.5 billion of mortgage-backed securities. The new statement suggests that Freddie retained exposure to greater than $19.5 billion, but it is unclear how much more.

If Romney doesn’t use this against Freddie Mac’s notorious lobbyist, Newt (yeccch) Gingrich, he’s missing a bet.  I’m sure Obama will be salivating to use it during the campaign IF Gingrich (yeccch!)
becomes the nominee.

If I could refi my house, every month I would use that saved interest money to buy something that was made in America. If we all did that we could put a lot of people to work.

If Freddie Mac is still on the hook for these inverse floaters, is someone else getting risk-free investment vehicles that pay off no matter what happens?

Is there a pattern to who is benefiting from these deals?

Who ever was in charge at the time Freddie Mac received tax payers money and used that money to invest against the very same people who provided it should be investigated.  I like to know about the personal motive.

Conscience of a Conservative

Jan. 31, 2012, 5:46 a.m.

This story is inaccurate and that Congressman are lining up in support either suggest a lack of understanding or playing to the media. Inverse IO’s are nothing more than a volatility play, a bet that the market is mispricing VOL.  Freddie is short volatility so some investments that benefit from the opposite direction make sense.  And back to an earlier point, I doubt that most who read this piece understand the securities involved; An inverse IO is nothing more than what’s left over after taking a fixed rate security and carving it up into a floater. Freddie Mac is correct in saying there trading desk was walled off.  I’ve been a huge fan of NPR & Pro Publica over the years, but on this story you have it wrong.

Chris Sorensen

Jan. 31, 2012, 7:06 a.m.

You’re missing the point entirely.  My fear is, that if you’re missing it there will likely be many in the investment world that will miss it as well.
We are dealing with perception.  Regardless of the merits or what you refer to as benign trades, the arrogance and callousness demonstrated by these trades is astounding.  We are dealing with millions of American lives that have been financially ruined, forever.  It is due to the belief in our American system of justice and a sense of fairness that we do not have riots in the streets.  Well, that and an unprecedented amount of food stamp and welfare recipients.

American borrowers who are honoring their financial commitments and sacrificing to do so, do not wish to learn that the very entity their Grandchildren will be paying off, was wagering against them.

On point, we’re dealing with social engineering here and I for one hope to avoid more OWS movements fanned by the flames of stupidity and ignorance towards the suffering of our fellow man.

To Chris’s point, it’s not just the abstract “betting against,” it’s demonstrating that at least this corner of the government has a profit motive (itself obscene, since they work for us, not vice versa) and puts them in a position where they profit from our misery.  If two and two make four, then it’s nonsense to assume the agencies are helping anybody but themselves.

Meanwhile, this article then demonstrates a lack of interest, as everybody overseeing Freddie and Fannie cover their eyes and claim they have no authority to make decisions.  The modern equivalent of “Befehl ist Befehl,” I guess, “Inferior Orders.”

Most egregious, though, is doing so after being told not to.  To what public benefit is this that directions and regulations can be disregarded without any consequences?  Bruce and Ben are right that this didn’t happen accidentally, and I’d like to know what’s at the other end of the tunnel, too.

The Government needs to get rid of Freddie Mac.
How dare they bet against homeowners and keep
this economy is a depression?

Is this why banks were “loosing” paperwork when people were trying to get a refi?  What connection do banks have with this?

Margret Brady

Jan. 31, 2012, 4:24 p.m.

My Ditech Mortgage was owned by GMAC, which sold it to a subsidiary named Rescap that managed the mortgages sold to another subsidiary to be placed and sold as created securitized trusts. Anthony Renzi was head of Rescap when its investments began to tank and he was forced out by GMAC. a few months later he went to work for Freddie Mac.Later GMAC sold many of those same mortgages to Fannie Mae as part of their bailout deal. That was all about the time that the head of GMAC was J. Ezra Merking, the Madoff budy who sat on the board of Ceberus, the company that had to give up its majority ownership of GMAC in order to let the bailout deal go through. I doubt that Merkin or Renzi was protecting the homeowners interest.  No matter where they are employed, I’ll bet they earns incomes to help them maintain their 1% lifestyles.. I still can’t find out where my mortgage is today and I’m beginning to believe that they have no idea what they did with all those GMAC mortgages either..

But what about the Silversteins? The Silversteins!!!

I admire ProPublica, but this story was flat out wrong. It took a widely known and accepted industry practice and twisted it into something totally off base.

Because if the story simply reported, “there is a natural tension at the GSE’s between saving taxpayer money and doling it out to homeowners,” it would have been too obvious that this was not news.

Chris Sorensen

Jan. 31, 2012, 5:23 p.m.

Steve, I understand and assure you I and many like me, “get it”.

However, I refer back to the social engineering comment and the fact that the leaders of this fine institution had a duty to perform their functions in a manner far different than they had previously done.

Under the circumstances, regardless of the financially salubrious move, it was ill advised.

You can’t make this stuff up!  Goldmine Sachs perfected the “Bet Against the Dumb Homeowner” bet.  Have they paid a price for that? Not with Hank Paulson insuring that AIG got MY money in the bail out so that HE got 100 cents on the dollar in his retirement payout.

Robin Hood in Reverse.

Yeah, Peg, and wasn’t I proud - NOT-  when my Alma Mater, University of Chicago,hired that goniff Paulson for five years, inter alia to:

“...found the Paulson Institute to promote international engagement, with a special emphasis on relationships between the U.S. and China,” Paulson said in a statement released on PR Newswire.

“Every global concern—economic, environmental or security-related—can be addressed more effectively when the U.S. and China work together,” Paulson said in the statement. “I look forward to devoting my time and energy to building the knowledge and relationships that can contribute to those solutions.”

May he rot.  But they always fall on their feet, these types.

Now I understand why i was not allowed to refi 5 years ago.  Now I understand why I have been forced down into bad credit so that I could be turned away from a modify or refi.  Now I understand why I lost my house.  Are monopolies illegal?  Isn’t this a monopoly that is putting people on the streets?  Isn’t what I just read is that they won’t refi people so they can hedge bet against them?  Isn’t this a type of monopoly that should be shut down immediately?  This one should not be shoved under the carpet people !

Chris Sorensen

Feb. 1, 2012, 8:33 a.m.

J. Calder,
I’m an indsutry expert who educates consumers.  In fairness, there is likely no correlation.  However, because there have been many decisions made in a, “the ends justify the means” approach to making money, I can’t be certain.
For anyone who reads my post here, know that I run a non profit designed for you, supported by local and state government and we have no other agenda than to use my knowledge to guide consumers.

This article is part of an ongoing investigation:
Freddie Mac

Freddie Mac

The taxpayer-owned mortgage giant made investments that profited if borrowers stayed stuck in high-interest loans while making it harder for them to get out of those loans.

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