Freddie Mac, frequently and wrongly blamed for the housing crisis by misinformed Republicans, appears to be doing little to help us get out of the crisis. According to a story by NPR and ProPublica, Freddie Mac is investing their money in such a way that disincentivizes refinancing loans on their books.
This is particularly troubling because Freddie Mac is a government sponsored enterprise chartered to help American homeowners, which is now profiting at the expense of homeowners it was created to help.
Freddie Mac, along with Fannie Mae, was created by Congress to make homeownership more attainable for Americans by buying loans from lenders and keeping them in their portfolio. This secondary market gives lenders access to fresh capital, allowing them to originate more loans, making it easier for Americans to become homeowners, in theory.
It certainly helped in the first half of last decade, but not without the help of a massive private secondary market, too.
Refinancing Considered a Threat
According to the NPR story, these days Freddie Mac has been securitizing its massive portfolio of mortgage-backed debt in such a way that makes it difficult for homeowners to refinance to get access to record low interest rates.
Essentially, they take a massive chunk of mortgage debts and split it up into tranches so that they held onto the interest payments only — called the “inverse floater” — and sell off the debt that collects payments on principal.
The inverse floater is the riskiest tranche of the security, explains NPR, and its profitability has a direct relationship with securitized loans’ interest rates — the higher the rates, the better the investment’s performance.
“If the homeowner is unable to refinance,” writes NPR, “the Freddie Mac portfolio managers win.” Any significant refinancing activity would be disastrous for Freddie Mac.
Low Rates Barred From Reach
Mortgage rates are at historic lows right now. It’s about 3.5% for a 30-year fixed rate loan in New York, according to Zillow. And because Freddie Mac is a “gatekeeper with the power to set [refinancing] rules” — which are very strict these days — this investment is particularly troubling.
They have the ability to help Americans cut their mortgage rates in half, potentially putting hundreds or thousands of dollars in their pocket every year, but they have made bets against any significant refinancing programs while they do nothing to make it happen.
Freddie Mac insists they are not guilty of any conflicts of interest, but it’s difficult to believe.
With the White House advocating for a more comprehensive refinance program, it seems we again have a case of federal housing policy at odds with itself. For shame.