Freddie
Mac’s regulator gave new detail today on why it halted the company’s controversial
trades in complex mortgage-backed securities last year. In a letter to Senator
Robert Casey (D-Pa), the Federal Housing Finance Agency said the trades were
risky and required specialized risk management.
ProPublica and NPR reported on Monday that Freddie Mac, the taxpayer-owned mortgage giant, placed
multibillion-dollar bets that pay off if homeowners stay trapped in expensive
mortgages with interest rates well above current rates. With Freddie in
government conservatorship, the FHFA is more than its regulator. It also acts
essentially as its board of directors.
“FHFA’s
concerns arose through its supervisory process, which found that the risk
associated with these transactions is inconsistent with FHFA’s goals of having
Freddie Mac reduce its risk profile and avoid unnecessary complexity that
requires specialized risk management practices,” FHFA acting director Edward DeMarco wrote.
As part of
the government bailout, Freddie and its sister company Fannie Mae were required
to sell down their investment portfolios every year. In the mortgage-backed
securities transactions at issue, known as inverse floaters, ProPublica and NPR
reported that Freddie had sold off some investments yet retained most of the
risk – possibly violating the spirit, if not the letter, of the
government agreement. Freddie is below the portfolio threshold mandated by the
government agreement.
It is
unclear if DeMarco was referring to the
portfolio-reduction mandate that Freddie operates under. FHFA didn’t respond to
a request for comment about the letter to Senator Casey.
Senator
Casey was not satisfied with the response from FHFA, according to a
congressional staffer, because questions remain unanswered.
In his
letter to Senator Casey, DeMarco wrote that Freddie’s
investment “did not – and was not intended to – have any impact on
homeowners’ ability to refinance.” He wrote that “the underlying premise of the
ProPublica story, that Freddie Mac securitization and investment practices are
meant to inhibit mortgage refinancing, is simply incorrect.”
ProPublica
and NPR did not state that the transactions “did” or were “meant to inhibit
mortgage refinancing.” Here’s what the original story said:
Freddie began increasing these bets
dramatically in late 2010, the same time that the company was making it harder
for homeowners to get out of such high-interest mortgages.
No evidence has emerged that these
decisions were coordinated. The company is a key gatekeeper for home loans but
says its traders are “walled off” from the officials who have restricted
homeowners from taking advantage of historically low interest rates by imposing
higher fees and new rules.
According to
the FHFA, Freddie has ceased making new inverse floater investments. However,
the agency says that Freddie retains $5 billion of these investments on its
books. They continue to require the same “specialized risk management” that
prompted the FHFA to halt any new inverse floater deals, raising the question
of whether the FHFA will force Freddie to sell them.
