Freddie Mac Betting Against Struggling Homeowners

The BBQ Pit
1

Three years ago we bailed out Freddie Mac to the tune of $169 billion for grossly mismanaging its funds, making risky bets and failing. We, the public, saved them.

Here’s how they’re making their money today. They loan out money to a responsible homeowner at, say 7% interest. Then they bundle the mortgages together sell off the principle portions of the note to another lender. They keep the interest bearing part.

Freddie Mac helps set the rules in which a refinance can happen.
So when homeowners look to refinance at current market rate of around 3.5%, Freddie Mac takes an active interest in denying them those refinance deals because they earn money ensuring the interest rates remain artificially high. Freddie loses money when homeowners refinance and pay off a loan early.

Conflict of interest? Business as usual? Stop stop. You’re both right!

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Well, that doesn’t sound right.

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Wasn’t there something about Newt Gingrich being a paid consultant to Freddie Mac?

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Yves Smith at Naked Capitalism has a piece up critical of ProPublica for breaking this story. It’s way over my head, but, as I understand it, she says that retaining the inverse floater is a longstanding practice of the GSEs to hedge their prepayment risks. And that this hedging is huge because the GSEs are huge, but it’s not at all clear what their net position is. It does seem problematic that Freddie Mac has a financial stake in keeping homeowners from refinancing, and also makes decisions about whether to allow refinancing. However, those are two separate parts of Freddie, and there doesn’t seem to be any real evidence of the one influencing the other.