COMMENTARY: Freddie Mac Must Go in Light of Its Practices

I awoke Monday morning, Jan. 30 to hear a report on my South Texas NPR station that Freddie Mac, one of two Government Sponsored Enterprises (GSEs) that I would like to see gone (the other is Fannie Mae) is “Betting Against Struggling Homeowners” and has “placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.” (Link: www.npr.org). Yes, this is the same taxpayer-owned mortgage giant that we — the long-suffering taxpayers — bailed out a few years ago.

The story, a joint venture between NPR and the nonprofit news organization ProPublica, added that “Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.”

Freddie sounds a lot like the feckless Wall Street banks that we bailed out under the TARP program, the companies profiled in the excellent HBO movie “Too Big to Fail” (I recommend the flick for those mostly nonreaders who want to understand what went wrong on Wall Street and plunged us into the biggest financial crisis since the Great Depression).

The NPR/ProPublica story went on to say that “No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are ‘walled off’ from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.”

Freddie’s charter calls for the company to make home loans more accessible, according to the NPR/ProPublica story. “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.’”

I read a dissenting view that said such trades were commonplace on Wall Street, but the last time I looked, Freddie wasn’t Goldman Sachs, Citigroup or any of the other Wall Street banks saved by taxpayers. As a GSE, it is backed by the credit of the USA, and it should be fully accountable to the federal government, in my opinion.

The trades, “uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.”

Echoing Capt. Louis Renault, played by Claude Rains in the classic 1942 movie “Casablanca” Scott Simon, head of the giant bond fund PIMCO’s mortgage backed securities team said “We were actually shocked they did this. It seemed so out of line with their mission.” Simon said the trades “put them squarely against the homeowner.”

Those homeowners have a lot at stake, too. Many of them could cut their interest payments by thousands of dollars a year.

Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get 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.

Jacob Gaffney at HousingWire, a mortgage news blog (link: http://www.housingwire.com), the dissenter referred to above, says Freddie is just exercising sound business practices, adding that “the same thing is happening at Ginnie Mae and Fannie Mae and just about everywhere a house is bought, sold and financed.”

Gaffney adds: “Yes, Freddie Mac securitizes loans. Yes, Freddie Mac doesn’t sit on those loans. …”Even more importantly, the very federal conservatorship status that both Fannie and Freddie are under is designed to protect their assets. That means keeping performing loans right where they are — in a position that most efficiently monetizes loans for investors.”

Gaffney goes on to write how large of an investor the United States of America is in Freddie Mac: “The Federal Reserve Bank of New York, acting on behalf of the Treasury, currently holds $835.6 billion of Fannie, Freddie and Ginnie mortgage-backed securities….Looks like one of the largest Freddie Mac investors, the U.S. government, is pretty confident in low-interest Freddie bonds.” My answer to mortgage expert Gaffney: “Sure, the U.S. government can do no wrong, even though its actions — and in the case of the SEC, inactions — contributed to the fine mess we’re in now.”

Under the headline: “Freddie Mac places multibillion-dollar bets against homeowners” business columnist and author Loren Steffy of the Houston Chronicle (“Drowning in Oil: BP and the Reckless Pursuit of Profit.” ( link to my review:.www.huntingtonnews.net/…/101207-kinchen-columnsbookreview.ht..) says Freddie Mac’s placing multibillion-dollar bets that homeowners would stay trapped in expensive mortgages with high interest rates, known as inverse floaters, “even as it was making it more difficult for homeowners to get out of high-interest mortgages” “give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.”

Steffy adds that as “Aaron Layman points out, Freddie and Fannie Mae are already under fire for jacking up fees and making it more difficult for homeowners to refinance existing mortgages. Your bailout dollars at work.”

This is my opinion and you can take it to the bank: It’s long past time that we do away with Fannie and Freddie and bring some Canadian common sense (“Canada: Like Us, Only Smarter”) to our mortgage market. In the Great White North, only people who can afford to buy a house can get a mortgage. Canada has no equivalent of our Fannie Mae, Freddie Mac or Ginnie Mae and is better off because without them. We’ve had FHA since the 1930s and it has served the housing consumers of the nation well in the past and can continue to do so. We should also call a halt to the idea that everybody should be a homeowner, when the reality is that not everybody should be or in many cases wants to be a homeowner.

 

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