Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
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.
Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”
But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.
“We were actually shocked they did this,” says Scott Simon, who as the head of the giant bond fund PIMCO’s mortgage-backed securities team is one of the world’s biggest mortgage bond traders. “It seemed so out of line with their mission.”
The trades “put them squarely against the homeowner,” he says.
Those homeowners have a lot at stake, too. Many of them could cut their interest payments by thousands of dollars a year.
Even if Freddie Mac was following its charter, the optics on this are pretty much "salted and scorched earth after getting blasted into glass craters" where the American housing market used to be. If the entire reason the housing depression has continued is because Freddie Mac is making it so homeowners can't refinance, then it's not that somebody's head will roll, it's a question of whose cranium goes for a spin 'round the block.
HousingWire's Jacob Gaffney is already calling the piece a "witch hunt", saying that there's "no new evidence" that Freddie is doing anything bad, and that the entire point of Fannie and Freddie existing is to make money in order to stay in business, they're just hedging their bets that the credit markets will remain tight for the foreseeable future.
So far, that's been a very profitable bet. But that still brings us back to the optics question and in an election year to boot, and the reason why the optics are bad is that Freddie is big enough to influence the entire mortgage market into something of a self-fulfilling prophecy, especially given the rule changes Freddie has made to issuing mortgages, making them tougher to refinance.
The much larger issue is that in order to fix the housing depression (now in year number five) we need something outside the current Fannie/Freddie/Ginnie Mae system, and that's for Congress and the President to step in with principal reductions and cramdowns. There's still millions of foreclosed homes on the market, with another 1.9 million new foreclosures in 2011. While that's down from earlier highs, 2012 is expected to be over 2 million more easily.
It's going to take decades at this rate to work through the foreclosures. And Freddie Mac isn't helping in the least. But the bigger problem is until something massive is done about the equally massive bloc of foreclosures on the market, the economy will continue to do the dead, smelly fish thing all over the country.
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