Journalism in the Public Interest

Senator Demands Answers from Freddie Mac’s Regulator

Sen. Robert Casey, D-Pa., today sent a series of questions to Freddie’s regulator, highlighting how much remains unknown about the mortgage giant’s controversial bets against American homeowners.

Photo by PAUL J. RICHARDS/AFP/Getty Images

Sen. Robert Casey, D-Pa., sent a list of questions about Freddie Mac’s controversial trades to the mortgage giant’s regulator, highlighting how much remains unknown even after a flurry of statements from the regulator.

ProPublica and NPR reported on Monday that Freddie Mac, the taxpayer-owned mortgage-insurance company, placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.

Questions the senator put to the regulator, the Federal Housing Finance Agency, include why Freddie made the deals in the first place, when the FHFA learned of the trades, what role, if any, the FHFA played in them, and what the FHFA plans to do about the billions of dollars worth of deals Freddie still has on its books.

Freddie began increasing those deals, called inverse floaters, deals 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, and Freddie says that they weren’t.

But the trades highlight a conflict of interest: Freddie’s charter calls for the company to make home loans more accessible, but Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Freddie and its sister company, Fannie Mae, are regulated by the Federal Housing Finance Agency. But with those companies in government conservatorship, the FHFA is more than a regulator. It also acts essentially as Freddie’s board of directors.

In a letter to Casey dated Tuesday, FHFA Acting Director Edward DeMarco said Freddie’s trades, known as inverse floaters, had raised “concerns.” He explained that the FHFA believed “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.”

In a previous statement, DeMarco said those concerns forced Freddie to agree not to engage in any new inverse floater deals. Freddie had stopped making the deals a few months earlier, according to the FHFA, but it is unclear why. Freddie retains about $5 billion worth of the floaters on its books.

In his letter today to DeMarco, Casey wrote:

… I would appreciate you addressing some additional questions:

· What rationale did Freddie Mac have for its increased purchase of inverse floaters in 2010 and 2011?

· What was FHFA’s involvement in the sale? Please detail for me when FHFA was made aware of these purchases, and when they intervened.

· What type of oversight does FHFA practice over Freddie Mac’s investment division? Are potentially risky trade pre-approved by you or other FHFA officials?

· Although Freddie Mac has ceased their purchase of the types of securities in question, they are still in their portfolio. How does FHFA plan to address these securities moving forward?

· What steps will you take to ensure that in the future FHFA is able to intervene before risky trade take place?

Seems to me that if we, the taxpayers support this agency, then we must own all those abandoned and foreclosed on buildings.  Why don’t we take possession of them and do something useful with them.  Like paying people to fix them up or tear them down.  Lots of construction workers are out of work and lots of people are homeless. 
How about the bail-out money to the banks.  What collateral do we have and why don’t we repossess it and help people with it , too

Ira Grosesman

Feb. 3, 2012, 6:03 p.m.

Having read Joe Nocera’s ‘All the Devils Are Here”, Simon Johnson’s “The Thirteen Banks and Michael Lewis’s “The Big Short” I can say that Fannie Mae and Freddy Mac were the centers of evil for the housing crisis.

I agree with LA Johnson. If we own them, which I’m skeptical about, then we should use them. However, I believe Propublica covered this issue recently with the answer to ‘why” do they behave the way they do. They have a mixed mission. On the one hand, they are supposed to make money and pay back the government for the money they got in the bailout, on the other, the original mission was to make home ownership affordable to more people. Perhaps it is time to relive Freddie and Fannie of one of their contradictory missions, and pass that one on to another entity. We are learning how hard it is to give one agency more than one purpose. It is particularly difficult to expect an agency to oversee itself. That was the purpose of forming an agency within the Treasury to protect the public from predatory financial institutions.

It seems to me that the Government needs to get tid of
Fannie and epecially Freddie or fire the principles and
hire new people.

I can’t believe Freddie Mac or Fannie Mae ever participated in these toxic investments and that they are still doing it today.  What kind of craziness is this?  Both agencies were taken over by Wall Street traders before the big crash and apparently they were one of the biggest reasons for the unprecedented transfer of wealth to the top 1% the world has ever seen.  Not acceptable.  Time to shut them both down and start over with a new agency that actually helps average Americans instead of the robber barons at the top.

I think it’s not really as complicated as it looks.  These agencies and Wall Street have been playing a rigged shell game with the economy and the people of our country.  They provide no real product, they provide a questionable service that is full of complex rules which allow them to hide what they are really doing, and they do this because we let them.

LA Johnson, as I understand it, we let the banks do whatever we want because they threaten to crash the economy every time we don’t.

I won’t call it a conspiracy so much as a time-honored gimmick, but Alexander Hamilton was convinced to have a government-run central bank until the banks of the time threatened to tank the dollar on international markets.  When Andrew Jackson threw passed on renewing the Bank of the US charter, he got similar threats.  The list goes on.

Like the energy companies, it’s hard to take a stand against someone who can turn out the lights.

I am certain that behind those inverse floaters you will find that some entity or entities outside of Freddie Mac stand to reap huge financial gains.  So much for the hope and change we were promised by our current president.  It is hard not to be cynical with this type of oversight.

William Bonta

Feb. 7, 2012, 2:48 p.m.

Republicans are fond of blaming the Housing agencies for all the country’s troubles.  It’s just another way of blaming big government for our economic crisis.  I believe however that the real cause was the repeal of the control of government over investment firms and big banks.  This was enacted by the three heroes of free markets; Grahm, Leach and Bliley. when they repealed the Glas Steagle Act in the last year of Clinton’s term.  Thus the Republican steamroller rolled over Clinton’s threatened veto and carried the day under the banner of free markets led by none other than Alan Greenspan.  I remember during the post crash hearings Greenspan almost cried when asked what happened.  He said that “40 years of training and theory was all wrong” (talking about the forces of the free market).  And when asked what he believed was the reason for the collapse replied “it was pure greed that took hold”.  All the fake securities “the products” flourished.  Selling shares of a sewer system in Germany, indeed.  I believe the fix is to return to the principles of Glas Steagle and have the government do the same kind of protecting created in the thirties.  After all this sort of use of government was recognized as a result of the great depression and it carried us very well until the days that the the powerful interests started to prevail after Reagan.

Conrad…..oh boy, now we’re going to blame President Obama for Fanny and Freddie Mae!  That’s ridiculous….this was going on several presidents back…quit trying to blame EVERYTHING on President Obama, especially when he had nothing to do with it!!

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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