Is Freddie Betting Against Homeowners?

A probe of Freddie Mac revealed that the mortgage insurance giant has situated itself to benefit from banks stonewalling their customers, and has taken steps to make it more difficult for those locked in high-interest mortgages to refinance to lower rates.

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An investigation by National Public Radio and ProPublica found that the government-sponsored enterprise has spent billions betting homeowners won’t be able to refinance their high-interest mortgages, while taking steps to ensure they’re right.

Freddie’s investment arm was profiting from homeowners with high-rate mortgages, leading Freddie and its larger cousin Fannie Mae to impose new rules and regulations, and introduce new fees, that have effectively narrowed the number of borrowers who qualify for a Freddie-insured mortgage.

The investigation suggests that, while the investment arm is betting homeowners won’t be able to refinance, the credit side is making sure lenders have enough money to make loans.

The Federal Housing Financing Agency says a wall exists between the two sides, while Forbes defends Freddie, saying that the investment was a reasonable bet based on current market conditions, and that Freddie’s $3.4 billion investment is less than 1 percent of its $663 billion portfolio, which means the bet won’t move the needle much.

NPR and ProPublica say that Freddie invested in mortgage-backed securities in 2010 and 2011 that appreciate when homeowners are unable to qualify for refinancing. If homeowners are able to refinance and their loans drop out of the securities in which Freddie has invested, the securities decline in value.

This puts Freddie Mac “squarely on the opposite side of the homeowner,” says Scott Simon, managing director of the mortgage-backed securities team at PIMCO. “So if the homeowner lost and was unable to refinance, they win, and if the homeowner can refinance, they lose.”

Brad German, a spokesman for Freddie Mac, says: “There is no question that borrower who meet the requirements should be able to refinance, but lenders are tightening credit for their own reasons.” German adds that, “Refinancing is Freddie Mac’s bread and butter in today’s marketplace,” accounting for 75 percent of the company’s business in 2011 and 80 percent in 2009 and 2010. “In three years we refinanced more than 4 million mortgages totaling $855 billion.”

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com