Borrowing a page from Goldman Sachs and other Wall Street banks that bet against investments sold to investors, mortgage giant Freddie Mac is banking that Americans won’t be able to refinance their homes—even though making refinancing easier is one of the taxpayer-owned operation’s primary missions.

 

An investigation by ProPublica and NPR News found that Freddie Mac has been betting against refinancing opportunities since late 2010, which was around the same time it started to make it harder for homeowners to get out of high-interest mortgages.

 

“We were actually shocked they did this,” Scott Simon, former head of the giant bond fund PIMCO’s mortgage-backed securities team, told ProPublica and NPR. “It seemed so out of line with their mission.”

 

The problem is that Freddie Mac, which is run by the Federal Finance Housing Agency, has a dual mission. On the one hand, it is supposed to help homeowners refinance their mortgages at lower rates. But on the other hand, it is supposed to use its huge investment portfolio to make a profit. Enter a form of investment known as an “inverse floater,” which is backed primarily by the interest payments on mortgages. If interest payments are high, Freddie Mac makes more money; if homeowners refinance at lower rates, Freddie Mac’s profits go down.

 

The current practice seems similar to the one that led the country into a financial crisis in 2008. “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,” real-estate economist Christopher Mayer of the Columbia Business School told ProPublica and NPR. “These are the kinds of things that got us into trouble in the first place.”

-David Wallechinsky, Noel Brinkerhoff

 

Freddie Mac Bets Against American Homeowners (by Jesse Eisinger, ProPublica and Chris Arnold, NPR News)

Bets Against Homeowners Must Stop, Freddie Mac Was Told (by Jesse Eisinger and Cora Currier, ProPublica and Chris Arnold, NPR News)

Freddie Mac Profits From The Misery Of American Homeowners So That Banks Don’t Have To (by Matt Levine, Dealbreaker)