Is Freddie Mac Betting Against Homeowners?

Source: Alan Farnham / ABC News

A recent investigation into trades made by the taxpayer-owned mortgage giant shows that while Freddie with one hand is helping consumers get mortgages, it is, with its other, making those mortgages harder to refinance. Result: Homeowners trying to refinance their way out of high-interest mortgages say they feel trapped in “financial jail.”

The investigation-a joint effort between National Public Radio and ProPublica, an independent, non-profit investigative news service-looked at multibillion-dollar investments made late in 2010 by Freddie. These investments pay off only if homeowners remain locked in high-interest mortgages.

Not only do the investments appear to be at odds with Freddie’s public mandate, they increase the size of Freddie’s investment portfolio at a time when the Freddie, under the terms of a 2008 bailout agreement, is supposed to be reducing it. Both Freddie Mac and Fannie Mae were bailed out by U.S. taxpayers in 2008 and are now owned by the public.

The NPR-ProPublica report finds, too, that Freddie’s new investments have increased the volatility of its portfolio.

Securities owned by Freddie fall into two categories. In one are those backed mainly by principal. These pay a low return but are considered low-risk. The second category holds securities backed by mortgage interest payments only.  These pay a higher rate but are considered riskier, since, if homeowner defaults, Freddie as the insurer must pay the entire value of the mortgage. Known as inverse floaters, these investments are harder for Freddie to offload onto investors.

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