Even though the job of bailed-out mortgage backer Freddie Mac is supposed to be about making it easier to own a home, the traders at Freddie have reportedly been buying up investments that put the company at odds with homeowners who want to refinance their pricey mortgages.
According to an investigation by ProPublica and NPR, Freddie Mac traders have spent the last two years snapping up billions of dollars in “inverse floaters,” the portion of a mortgage-backed security backed mainly by interest payments. It’s a higher return on investment than the remaining majority of that security which is backed by principal payments, but it’s also much riskier.
Aside from the risk of being left holding the bag if homeowners simply bail on these mortgages with interest rates generally in the 6-7% range, these investments mean Freddie Mac is betting against these homeowners being able to refinance.
If a homeowner refinances, that original, high-interest loan is paid off before the new loan is issued. That means they are no longer paying the interest on that loan, and the value of the inverse floater owned by Freddie Mac has just decreased.
The Federal Housing Finance Agency has oversight over Freddie Mac, and the NPR/ProPublica report says that the FHFA admitted to being aware of these questionable trades when it was reached for comment, though an FHFA official wouldn’t say whether the agency knew about or approved the trades at the time they were being made.