Freddie Mac Told To Stop Betting Against Struggling Homeowners

Yesterday, it was reported that bailed-out mortgage titan Freddie Mac had invested billions in mortgage-backed securities that would really only pay off if struggling homeowners were unable to refinance their high-interest mortgages; investments that appear to put Freddie in direct conflict with its goal of making it easier to own a home. Now the federal regulators in control of Freddie Mac say they have already put a halt to these trades.

The Federal Housing Finance Agency issued a statement yesterday saying that it had voiced its concerns about the billions Freddie Mac invested in inverse floaters — the portion of a mortgage-backed security that reaps most of its return from the interest on mortgages — late in 2011 and that Freddie agreed in December to put an end to the trades.

However, Freddie still owns about $5 billion in inverse floaters, reports ProPublica. And while these high-risk investments can earn a large payback, they are also significantly harder than principal-backed securities to sell off.

Inverse floaters are problematic for Freddie, not just because of the risk involved, but because they rely on homeowners continuing to pay higher interest rates. If a homeowner refinances his mortgage, that loan is paid off before the new, lower-interest loan is issued. That means that the original interest payments are stopped and the value of that inverse floater drops.

Given the number of homeowners in the U.S. with interest rates over 6%, and that a 30-year fixed mortgage can now be had in the 4% range, refinancing makes sense for many Americans.

Bets Against Homeowners Must Stop, Freddie Mac Was Told [ProPublica]


Edit Your Comment

  1. drblair says:

    So we bail them out, only to get back into hot water again.

    Why aren’t the people who orchestrated and approved the bailout in jail again?

    • Darrone says:

      Why aren’t corrupt police officers in jail? Shouldn’t they have arrested themselves by now?

      In all seriousness, this isn’t a fault of the bailout, it’s a fault of Freddie Mac.

    • El-Brucio says:

      Because there are different, unwritten laws for the rich, but whenever anyone points it out they get accused of class warfare and communism.

      And for some reason this is enough to get the majority of the population to stop asking for justice and everyone else to get labelled as fringe activists.

      • Darury says:

        It’s not so much the “rich” as it is the connected. The political class in this country has become a club that while it allows new members, doesn’t bother itself with things that are for the “common good”. How many “Transportation Authorities” actually ride the bus routes they design? How many times do we see police officers get “warnings” or less about things that would get you or I thrown in jail?

        Laws are for the little people.

    • Cat says:
  2. tmitch says:

    Yeah, refinancing would make sense IF home values hadn’t dropped so much. It absolutely does not make sense to refinance only to have to pay PMI because one’s home is now worth so much less that the homeowner no longer has the equity to avoid PMI.

    How are people supposed to refinance under these conditions?

    • LanMan04 says:

      It makes a LOT of sense if the amount of $$ you save per month by refinancing is greater than the amount of PMI.

  3. akronharry says:

    Another example of how our country is spiraling downward. Betting against what they are to represent? I just don’t understand what is happening anymore.

  4. dolemite says:

    I’m trying to decide on refinancing. It would be a no-brainer except I refinanced 2 years ago at 5.25%. And while they tell you it will be X amount, it always seems to be X+Y once you get to the end, and you spend a lot more than expected.

    I’m tempted to try for a 15 year though. Those are around 3.5% and the house payment would only go up about $120 a month. The last time I tried though, they said I didn’t qualify, which is really weird since I have really good credit.

    • homehome says:

      It’s more than just having good credit. Good credit helps but it ain’t the end all and be all. The fact is a major chunk of ppl who bought homes, shouldn’t have bought them in the first place.

    • scoutermac says:

      When my wife and I went to buy our first home we had excellent credit, money for the down payment, and good jobs. We applied and were turned down with no explanation. We tried our third lending company a mortgage broker. We were able to get a mortgage there. Next thing we know the banks and mortgage company we previously went to suddenly wanted to give us a mortgage.

    • ARP says:

      How long are you going to stay in your place? If your rate is significantly lower, you can get your closing costs back in a year or two and then save additional money. But you need to be prepared to stay in your place for a while to realize those savings.

  5. Mr. Fix-It says: "Canadian Bacon is best bacon!" says:

    Freddie Mac making it harder for people to own a home instead of easier?

    – – – – –

    Everything you know is wrong;
    Up is down, black is white, and short is long.
    And everything you thought was so important doesn’t really matter…

    Everything you know is wrong;
    just forget the words and sing along!
    All you need to understand is
    Everything you know is wrong!

  6. Tiercelet says:

    This is a non-story.


    The short version is:
    – Freddie has these because (a) they’re opaque, and thus hard to sell; and (b) they’re a hedge.
    – The people profiled in the ProPublica article are not good candidates for refis anyway.
    – What we really need to do is make principal modifications / cramdowns to reduce the amount of money owed on the houses — to force banks to share the decline in house values. Refis are basically just delaying foreclosure, and don’t make financial sense when the house value has plunged so much.

    • lxa1023 says:

      (b) they’re a hedge


      If homeowners make their payment, freddie makes money, if homeowners don’t make their payments, freddie makes money, it’s a hedge which is actually a smart thing to do… surprised freddie did it.

      • SideshowCrono says:

        Why is it that only a couple people ever seem to understand this stuff?

        Hedges, in an appropriate fashion, are exactly what companies like Fannie Mac should be doing.

  7. jvanbrecht says:

    Heh.. Floater.. best term for this kind of story because the first thing that comes to mind when I see the term floater.. is well.. a floater that refuses to flush :P

  8. conquestofbread says:

    The economy sucks. Why keep foreclosing on houses that are just going to sit on the market?

    It makes more sense to me to help people refinance — I believe Congress passed legislation to try to free up funds or something for refinancing, but I guess very few people qualify, and banks aren’t on board.

    The people get to keep their homes, and the banks have SOME money coming in, rather than a depreciating asset they seize and then have to maintain and try to sell in a bad market. Win-win.

    • scoutermac says:

      We the people know and understand this. But the banks disagree.

      • HomerSimpson says:

        Yes…the banks want ALL the money (and then some). This “we should be satisfied with *something*” does not compute with them.

        • Kuri says:

          We say “We would be satisfied with “something”” The banks say “Well we would be satisfied with everything.”

          • conquestofbread says:

            I think you’re right.

            Other businesses, like credit cards, understand that they aren’t going to get every penny back from every customer, and usually if someone stops paying, are willing to make a deal so they can stop putting money toward collections, get some return on investment, and cut their losses.

            I have a coworker who wants to buy a home with her daughter. They were looking at homes in the same district her grandkids go to school with in-law apartments, and found a place they like. The house was foreclosed on and needs a lot of work — new roof, floors need to be redone, and a bunch of other stuff.

            They just put in an offer for about 5k over what the previous homeowner’s loan was for and the bank rejected it! Apparently getting all of their money back and then some on a property that needs fixing is not good enough.

            • Kuri says:

              The bank possibly knows that they might be obligated to have the place fixed up to the standards of the buyer, so it’s cheaper for them to let the place rot and let property values all over suffer.

  9. dush says:

    So they may have made a bad investment. If they can’t cover what losses may come they go bankrupt. Simple.

  10. Matthew PK says:

    Perhaps what we should do is stop having the taxpayer sponsor them?
    Forget about the bailouts… F&F still have special rules as GSEs.

  11. CreditSense-CreditRecovery says:

    Principle reductions are truly the only answer when it comes to any interest in the homeowner. Refis are a joke because as pointed out so many times, home values have dropped to far.

    It’s interesting that Pete Rose may never make the Hall of Fame because he was gambling on sports, but Freddie Mac not only gambled, but bet directly against the very product they were providing. At least Pete Rose still maintains he never bet against his team, or threw a game to win a bet. It’s a travesty.