Journalism in the Public Interest

Senators Slam Freddie on Bets Against Homeowners

There is increasing scrutiny in Washington on Freddie’s risky investments. 

(Alex Wong/Getty Images)

Sen. Robert Menendez, D-N.J., had sharp words for Freddie Mac's investment practices and conflicts of interest at a Senate Banking Committee hearing Thursday.

The senator's concerns came in the wake of a ProPublica and NPR report that Freddie, the giant taxpayer-owned mortgage company, had made concentrated investments in complex mortgage securities that benefited from the inability of homeowners in high-rate mortgages to get refinancing. During the same period, Freddie also made it harder for people to get refinancing. Freddie said the decisions were separately made and that there was a firewall between them.

"I don't understand why you make a bet that you can largely control the outcome of, and want your bet to lose," Menendez said. "I think that's against human nature, so I'm not quite sure these firewalls exist in a way that aren't affecting policies. And that's a problem."

Speaking earlier to NPR, the senator called the investments "outrageous."

The issue is heating up in Washington. On Tuesday, 10 senators sent a letter to Edward DeMarco, the head of the Federal Housing Finance Agency, the regulator that oversees Freddie Mac, calling the report "deeply troubling."

"If the inability of homeowners to refinance their homes enhances Freddie Mac's bottom line, this is especially troubling," the letter said. "Freddie Mac exists to support the housing market, and it should not have a financial incentive to make it more difficult for struggling homeowners. Such actions by Freddie Mac are contrary to the best interests of American homeowners, sound economic policy, and its mission." (Read the full letter.)

And the inspector general for the FHFA confirmed Wednesday that it is looking into Freddie Mac's investments. "We currently have an open evaluation on capital markets, which encompasses this issue. We'll know more when the evaluation is completed," the government watchdog said.

Separately, Freddie Mac's chief executive, Charles Haldeman, disputed the ProPublica and NPR story in a piece on the American Banker's website.

"The major claim is that Freddie Mac worked against homeowners' ability to refinance in order to boost the performance of specialized securities that make up roughly 1% of our investment portfolio," Haldeman wrote. "This is just not true."

He added: "The securities in question helped us protect the value of our investment portfolio and reduce our need for taxpayer support."

ProPublica and NPR's story did not actually claim that Freddie's efforts to tighten mortgage standards were done to boost the investment value of its securities, called "inverse floaters." The story reported that decisions to limit credit were made at the same time that the company ramped up its investments, but the story said there was no evidence that the two actions were coordinated. As the story noted, Freddie says there is a strict firewall between the two businesses.

so Fredie and Fannie, who have yet to be held accountable yet alone be reformed in any way….....basically tried to make money similar to the way those “evil” banks did

where is the govt shack down for them?

Oh yeah, their are part of the biggest corruption yet.. our govt at work

You know Tim the problem isn’t really government corruption. The government is made up of people just like you and me. The problem with corruption is that it is at every level of our society and is in our corporations.

Face it, too many of us are greedy and our ability to rationalize bad and corrupt behavior is limitless.

Corruption also comes in many flavors. It is inherent in the good ole boy system that our businesses and governments run on. It is in the nature of too many of us, if not all to some degree, to look for advantage and to show favoritism to those we like and those who do us favors. The end result can be a corrupting influence.

Then, of course, we have the more blatant and obvious corruption. So to me the question is how do we change a corrupt society? It has existed throughout history and is impossible to stop.

Haldeman.  Now there’s a name from history that insprires confidence.

Catherine G. Tripp

Feb. 23, 2012, 3:05 p.m.

Principal reduction is the soundest, most logical, least disruptive way to clear up this mess.  So the bankers won’t go for it.  Not a forward thinking group, and resistant in the extreme to marking-to-market.  When I worked for Homestead Savings, we had three reporting types: GAAP (Generally Accepted Accounting Principles), RAP (Regulatory Accounting Principles) and CRAP (Commonly Ridiculed Accounting Principles) - guess which one gets used for shareholders?

CRAP.  I think my accountant uses that for my taxes.  At least, I think she does.  Thanks, Catherine.  I needed a good laugh in between the tears.

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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