Government-owned firm outrageously profits when you can't refinance
Think the decks are stacked against homeowners these days? You're right, in ways you might never have realized.
Freddie Mac, a taxpayer-owned mortgage company that got government bailout money in the 2008 financial crisis, is supposed to support homeownership in the U.S. -- and cheaper mortgages certainly support homeownership.
But, as ProPublica and NPR reported, Freddie also has invested billions of dollars in assets that will lose value if homeowners refinance their mortgages at lower rates.
So Freddie profits when you don't save.
That's an enormous conflict of interest, even if there's no evidence Freddie has blocked homeowners' ability to refi to protect its investments.
Owned by the U.S. government and overseen by a regulator, the Federal Housing Finance Agency, Freddie Mac would seem to be one of the good guys, an organization that works to make owning a home as affordable as possible.
The organization has even said so -- explicitly.
In December 2011, Freddie's chief executive, Charles Haldeman, told Congress that Freddie is "helping financially strapped families reduce their mortgage costs through refinancing their mortgages."
Freddie fulfills its "public mission to stabilize the national residential mortgage markets and expand opportunities for home ownership," as its website says, by purchasing loans from lenders, including most of this country's banks. The lenders can then make more loans (and earn a bit by collecting monthly payments on the whole group), and the number of homeowners steadily increases.
In an ordinary year, Freddie Mac (and Fannie Mae, which does more or less the same thing) has a pile of loans and an income stream that goes up or down with the interest rate on those loans.
But these mortgage giants don't just hang onto loans. They turn them into mortgage-backed securities and sell them to investors.
Only in 2010 and 2011, Freddie began keeping more and more of the lucrative parts of the securities for itself and setting up a huge conflict of interest in the process.
The securitization technique, which is entirely legal, works like this:
- Freddie bundles the mortgages it owns into different packages and sells them to investors.
- Some buyers get the safest part of the mortgage and make their money by receiving the mortgage principal that homeowners pay back over time. This security pays a low return but is considered a safe investment.
- On more than two dozen different deals, according to the ProPublica investigation, Freddie kept the more volatile part of the mortgage -- the interest payments.
- This part of the security makes Freddie a lot of money -- particularly on a mortgage carrying an interest rate above 6% -- but also carries a huge risk. If borrowers pay off loans early, usually because they've refinanced into cheaper mortgages, Freddie loses money.
If Freddie is enjoying 7% interest on your loan, my loan and every other loan in its portfolio, the agency will lose big money if we all take out new mortgages at 4%.
Freddie says it's "actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates," and it takes part in the Home Affordable Refinance Program (HARP), an Obama administration plan that so far has helped many fewer homeowners than envisioned.
The Federal Housing Finance Agency responded to the ProPublica report saying it "specifically directed" Freddie not to consider how its investments would be impacted in supporting refinance efforts.
But you have to wonder if Freddie is participating enthusiastically and aggressively in helping homeowners get new loans given its bet against those same homeowners.
It sure doesn't pass the smell test.