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]