LOL: Freddie Mac caught betting against homeowner’s refinancing

Read here:

NPR and ProPublica released an explosive report Monday that found government-owned mortgage giant Freddie Mac betting against the very homeowners it is supposed to help. According to the news article, the investment division of Freddie Mac (or as Henry calls it, Freddie’s “gambling desk”) placed billions of dollars of bets against homeowners who were trying to refinance their mortgages at lower rates.

According to NPR/ProPublica’s review of public documents, Freddie Mac invested in securities called “inverse floaters,” which receive all the interest payments from a specified mortgage-backed securities. “If lots of people ‘pre-pay’ their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money,” ProPublica’s Jesse Eisinger and NPR’s Chris Arnold explain. “If people can’t refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.”

Although Freddie Mac’s bets are legal, they’re highly offensive. Rightly or not, many Americans blame Freddie Mac and Fannie Mae — which was not mentioned in the NPR/ProPublica report — for the housing boom and subsequent bust. Nearly all Americans would agree the company’s should not be focused on generating profits, now that they are officially wards of the state and are using taxpayer dollars to make these bets, as Aaron and Henry discuss in the accompanying video.

Freddie Mac plays a significant role in determining mortgage rates and is one of the “gatekeepers” with the power to decide whether a homeowner can refinance at a lower rate. If homeowners can reduce their mortgage payments, then Freddie Mac loses money. Hence the conflict of interest and the concern Freddie has been turning down refi requests in order to benefit its proprietary trades.