Treasury Investigates a Bet Against Home Owners

January 31, 2012

The Treasury Department is investigating allegations against Freddie Mac that accuse the government-sponsored enterprise of “betting against home owners’ ability to refinance their loans” while also putting in roadblocks to make it more difficult refinance at today’s lower rates, White House spokesman Jay Carney said Monday.

Some argue the GSE imposed several barriers to home owners who wanted to refinance their mortgages, like adding risk-based fees. 

The White House says it has tried to get the GSEs to ease such refinancing restrictions, as well as participate in debt-forgiveness programs, so more home owners can take advantage of current low mortgage rates.

The Treasury Department announced last week that it would extend for the first time to Freddie Mac and Fannie Mae-backed loans incentives for lenders to forgive portions of homeowner debt in a refinancing program. 

But both GSEs have traditionally refused to permit debt reduction on its loans because it says it will create more losses to taxpayers. (The GSEs are backed by taxpayer money.) The GSEs did agree to review the current incentives, however. 

Several media outlets are reporting that Freddie Mac had a multibillion-dollar investment that hinged on borrowers continuing to pay higher interest rates, and they’re alleging that’s why the GSE wasn’t so eager to help more home owners refinance. 

“Beginning in 2010, Freddie bought several billion dollars' worth of ‘inverse floater’ securities — essentially the interest-paying portion of a bundle of mortgages — for its investment portfolio while selling the far less risky principal portion,” an article in The New York Times reports. “There is no evidence that Freddie tailored its refinancing standards to its investing strategy, but ‘inverse floaters’ make less money if the loans they cover refinance to a lower interest rate.”

Freddie denies any wrongdoing and, in a company statement said that it has stopped doing such transactions and only $5 billion of its $650 billion portfolio contained inverse floaters. In a statement issued Monday, the company said ''Freddie Mac is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates.” What’s more, the company says that refinancings made up 78 percent of its loan purchases last year. 

Source: “Treasury Investigates Freddie Mac Investment,” The New York Times (Jan. 31, 2012) and “Is Freddie Mac Betting Against Home Owners?” ABC News (Jan. 30, 2012)