Why haven’t Freddie Mac and Fannie Mae been much more aggressive about refinancing the mortgages they hold?
That’s a $50 billion question. ProPublica and NPR have a $3.4 billion possible answer.
Jesse Eisinger and Chris Arnold report that Freddie Mac has placed a huge bet that homeowners in its loans won’t be able to refinance their mortgages. Around the same time the bulk of the bets were being placed, the company made it harder for homeowners to refinance their mortgages, something even the Federal Reserve criticized as “difficult to justify.”
That raises, yet again, the conflicts at the heart of the public-(formerly) private hybrids:
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.
That’s the big social conflict. The company is supposed to make mortgages more affordable, but if everybody refinances it will lose lots of money, which means taxpayers will eat the losses.
There’s another potential conflict here too: Freddie’s traders made big bets on an outcome (less refinancing) that other Freddie executives were about to make more likely:
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.
Freddie insists that the traders who placed the $3.4 billion in bets are separated by a Chinese wall from the folks at Freddie who decided to make refinancing less likely, but surely it’s worth asking whether the traders knew what was coming down the pike (to be sure, it appears most of the bets were placed after the new refinancing rules came about).
Now, perhaps this “bet against American homeowners,” as ProPublica calls it, is just a run-of-the-mill hedge used by Freddie to balance its risk portfolio. Freddie doesn’t help itself by refusing to comment on the issue, while Eisinger and Arnold report that the trades increased the portfolio’s risk.
But it doesn’t look good.
One reason existing refinancing efforts have fallen far short of their goals is that Fannie and Freddie continue to charge homeowners high, risk-based fees up front to refinance their loans you can avoid this if you check your rates and fees at 123 Refinance before you sign
#1 Posted by chrisnewellz, CJR on Tue 31 Jan 2012 at 03:56 AM
It's too soon to tell exactly what was going on here, due largely to the fact that this story is almost an object lesson in how not to report a complex finance story. Some highlights:
1) Ridiculous sidebar explaining how the instruments in question work. Five pictures of animated green & red bars, zero insight. USA Today called, they want their infographic back.
2) Almost totally tangential "put a human face on it" story featuring a nice elderly couple that overextended themselves and are now in "financial jail" because, with the poor credit history they've earned, they can't get bailed out by refinancing. The Audit lauded the use of this narrative device in Joe Nocera's NCAA columns, and rightfully so - his work was masterful. The ProPublica piece features its desperately constructed evil twin.
3) No attempt, none, to explain why Freddie Mac might have entered into these trades. They aren't private any more, so it wasn't for the benefit of evil banks, was it? This is the key question the story raises, but no attempt is made to answer it.
I guess blogs aren't dead yet - this one actually examines the interesting questions, no Silversteins required:
http://dealbreaker.com/2012/01/freddie-mac-profits-from-the-misery-of-american-homeowners-so-that-banks-dont-have-to/comment-page-1/
#2 Posted by Steve Rowley, CJR on Tue 31 Jan 2012 at 12:31 PM
Yves Smith hits the piece too. Worth a look.
http://www.nakedcapitalism.com/2012/01/propublicas-off-base-charges-about-freddie-macs-mortgage-bets.html
#3 Posted by Edward Ericson Jr., CJR on Tue 31 Jan 2012 at 04:44 PM