Taxpayer Backed Mortgage Giant Freddie Mac Bets Against American Homeowners

Taxpayer backed mortgage giant, Freddie Mac, laid down multi-billion dollar bets that pay off if U.S. homeowners remain trapped in expensive mortgages with interest rates well above current rates.

Freddie began increasing these bets dramatically in late 2010, all the while making it as difficult as it could for homeowners to get out of such high-interest mortgages. The company claims its traders are “walled off” from the officials who restricted homeowners from taking advantage of historically low interest rates by implementing new rules and higher fees.

Freddie’s charter calls for the company to make home loans more accessible.

Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.” But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a very strong incentive to do the exact opposite. The company has giant investment portfolios that could lose substantial amounts of money if too many borrowers refinance.

“We were actually shocked they did this,” says Scott Simon, head of the bond fund PIMCO, one of the world’s biggest mortgage bond traders. “It seemed so out of line with their mission.”

The trades “put them squarely against the homeowner,” he added.

Freddie Mac, along with Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The two companies insure most home loans in the United States and their rules determine whether homeowners are qualified for loans and on what terms.

The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.

Freddie’s moves to limit refinancing have negative consequences for not only individual homeowners but for the entire economy as well. An expansive refinancing program would help millions of homeowners, some economists believe.

Such an effort would “help the economy and put tens of billions of dollars back in consumers’ pockets, the equivalent of a very long-term tax cut,” says real-estate economist Christopher Mayer of the Columbia Business School. “It also is likely to reduce foreclosures and benefit the U.S. government” because Freddie and Fannie would incur less losses.

According to the terms of its government takeover agreement Freddie Mac was supposed to be reducing its investment portfolio, but these trades actually escalated the risk of its portfolio, because the securities Freddie purchased are volatile and hard to sell.

The financial crisis in 2008 was made worse when Wall Street traders made bets against their customers and the American public. Now, some see similar behavior, only this time by traders at a government-owned company who are using leverage, which increases the potential profits but also the risk of big losses

“More than three years into the government takeover, we have Freddie Mac pursuing highly levered, complicated transactions seemingly with the purpose of trading against homeowners,” says Mayer. “These are the kinds of things that got us into trouble in the first place.”

Freddie and the FHFA repeatedly declined to comment on the specific transactions.

But of course.

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