The report’s authors see echoes of the recent economic crisis in Freddie Mac’s investment strategy: The financial crisis in 2008 was made worse when Wall Street traders made bets against their customers and the American public. Now, some see similar behavior, only this time by traders at a government-owned company who are using leverage, which increases the potential profits but also the risk of big losses, and other Wall Street stratagems.
A new joint investigative effort from NPR and ProPublica has generated a report that the taxpayer-owned mortgage company Freddie Mac has been making financial bets that pay off if current homeowners do not refinance their mortgages–and at the same time has been working to limit the ability of mortgage holders to refinance.
In “Freddie Mac Bets Against American Homeowners,” Chris Arnold of NPR and Jesse Eisinger of ProPublica write, “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.”
At the same time, October 2010 changes to Freddie Mac’s rules regarding refinancing have made it more difficult for mortgage payers to refinance. However, Arnold and Eisinger also point out that “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.”
The investments made by Freddie Mac in 2010 and 2011, as detailed in the report, separately securitized the principal and interest portions of mortgages held by the company. And due to the large volume and complex structure of the deals in Freddie’s portfolio, refinancing of loans it holds would adversely affect its bottom line, “since the security Freddie owns is backed mainly by those interest payments.”
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