Claims that the Federal Home Loan Mortgage Corp.’s investments gave it an incentive to keep borrowers in high-rate mortgages were addressed by its regulator.
A story co-published Monday by ProPublica and National Public Radio claims the Freddie Mac “placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.”
ProPublica says it is “an independent, non-profit newsroom that produces investigative journalism in the public interest.” It was funded by Herb and Marion Sandler, who reaped an estimated $2.4 billion with the 2006 sale of Golden West Financial Corp. to Wachovia Corp. just before the housing market crashed. Golden West’s payment-option adjustable-rate mortgages left Wachovia on the brink of failure before being rescued in 2008 by Wells Fargo & Co.
NPR is partially funded by the Corporation for Public Broadcasting, which was created by Congress in 1967.
Today’s story claims that inverse floater securities trades made by the government-controlled enterprise give it a powerful incentive to avoid putting borrowers in lower rate loans and could leave it vulnerable to substantial losses if too many borrowers refinance. The leveraged trades, which were legal, were reportedly made as the McLean, Va.-based company was supposed to be scaling back on its portfolio.
At the same time that the trades escalated in 2010 and 2011, new post-settlement delivery fees were being introduced by Freddie.
The article cited a Philadelphia couple who took a short sale on another mortgage and are now stuck in a 6.875 percent mortgage. No mention was made about how much of a loss was taken by the lender on the short sale, just that they are being overcharged by Freddie.
Freddie’s conservator, the Federal Housing Finance Agency, fired back in its own statement today clarifying the collateralized-mortgage obligation trades.
The CMO structure is used to finance mortgages from smaller sellers and to sell portfolio loans. It reportedly reduces the amount of financing needed through debt securities, though it is more complex. FHFA said that no additional risk is taken on by Freddie through the inverse floaters.
The regulator said that Freddie stopped retaining inverse floaters in December because of concerns over risk-management controls. Only $5 billion of its $650 billion retained portfolio remains as inverse floaters.
“Freddie Mac’s retained portfolio investment in inverse floaters did not have any impact on the recent changes to the Home Affordable Refinance Program,” FHFA said. “In evaluating changes to HARP, FHFA specifically directed both Enterprises not to consider changes in their own investment income as part of the HARP evaluation process.”
