Freddie Mac Betting Against Struggling Homeowners

[CaseAgainstFaith]

Freddie Mac, a taxpayer-owned mortgage company, is supposed to make homeownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage.

But Freddie Mac has invested billions of dollars betting that U.S. homeowners won't be able to refinance their mortgages at today's lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom.

These investments, while legal, raise concerns about a conflict of interest within Freddie Mac.

"We were actually shocked they did this," says Scott Simon, who heads the mortgage-backed securities team at the giant bond trading and investment firm called PIMCO. "It seemed so out of line with their mission, out of line with what Congress wanted them to do."

n December, Freddie's chief executive, Charles Haldeman, assured Congress his company is "helping financially strapped families reduce their mortgage costs through refinancing their mortgages."

But public documents show that in 2010 and 2011, Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing.

Those trades "put them squarely against the homeowner," PIMCO's Simon says.

Freddie Mac's trades came at a time when mortgage rates were falling to record lows. Millions of homeowners wish they could refinance, but their lenders tell them they can't qualify for today's low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.

That raises concerns among some industry insiders who see a conflict: Freddie Mac's own financial health improves when homeowners can't refinance.

Simply put, "Freddie Mac prevented households from being able to take advantage of today's mortgage rates — and then bet on it," says Alan Boyce, a former bond trader who has been involved in efforts to push for more refinancing of home loans.

    This hypothetical example may help explain what happens:

    1) Freddie Mac takes, say, $1 billion worth of home loans and packages them. With the help of a Wall Street banker, it can then slice off parts of the bundle to create different investment securities, some riskier than others. The slices could be set up so that, say, $900 million worth are relatively safe investments, based upon homeowners paying the principal on their mortgages.

    2) But the one remaining slice, worth $100 million, is the riskiest part. Freddie retains that slice, known as an "inverse floater," which receives all of the interest payments from the entire $1 billion worth of mortgages.

    3) That riskiest investment pays out a lucrative stream of interest payments. But Freddie's slice also has all the so-called "pre-payment risk" associated with that $1 billion worth of loans. So if lots of people "pre-pay" their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can't refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.

http://www.npr.org/2012/01/30/145995636/freddie-mac-betting-against-struggling-homeowners

I see a huge conflict of interest here.  I also would love to see this blow up in their faces after the new home refinance option Obama was talking about in his SOTUA should pass.   While I know had we not bailed out the banks back then the recession would of been worse off, it still leaves a bad taste in my mouth that we did do it when you see stuff like this as a "thank you" from the banks.

[Eniliad]

You're shocked? I'm not.

[Meshakhad]

We should have siphoned the bailout money directly from the CEOs' bank accounts.

[Smurfette Principle]

You're shocked? I'm not.

Especially since this is what got them into the housing crisis in the first place, placing bets on who wouldn't be able to afford loans.

[Damen]

Fucking buzzards.

[N. De Plume]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

[Smurfette Principle]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

Yes, because the people who run the economy down aren't affected, not really. The people hurt the most are the poor and the middle class, and who cares about them?

[rosenewock21]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

Yes, because the people who run the economy down aren't affected, not really. The people hurt the most are the poor and the middle class, and who cares about them?

Those filthy socialists, of course.

[N. De Plume]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

Yes, because the people who run the economy down aren't affected, not really. The people hurt the most are the poor and the middle class, and who cares about them?

How many times, though, does it have to be demonstrated that a healthy middle class also makes the rich better off?

[Damen]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

No, you see, that would require foresight and the ability to have empathy for others. These buzzards have no empathy and they don't care about anything but increasing their own short term profits.

In short, they don't care if the market crashes again because they'll be laughing all the way to their Swiss bank.

[N. De Plume]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

No, you see, that would require foresight and the ability to have empathy for others. These buzzards have no empathy and they don't care about anything but increasing their own short term profits.

I’m not even talking about empathy. I’m talking so-called ‘enlightened’ self-interest. A little bit of that actually goes a long way to mimicking empathy if nothing else.

But you nail it when you identify it as short-term thinking. Why the fuck is it next to impossible for anyone in the financial sector to think about the long haul? Why?

[nickiknack]

Why the fuck is it next to impossible for anyone in the financial sector to think about the long haul? Why?

Because they're douchebags

[StallChaser]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

No, you see, that would require foresight and the ability to have empathy for others. These buzzards have no empathy and they don't care about anything but increasing their own short term profits.

I’m not even talking about empathy. I’m talking so-called ‘enlightened’ self-interest. A little bit of that actually goes a long way to mimicking empathy if nothing else.

But you nail it when you identify it as short-term thinking. Why the fuck is it next to impossible for anyone in the financial sector to think about the long haul? Why?

Using the pie analogy, they don't care about the absolute size of their slice (how can they when it's far too large for any one person to possibly eat?) but its size relative to others.  There is no correlation between wealth and well being at that level, so the only thing left is to be able to afford shit nobody else can.  Whether that's by making themselves richer or others poorer doesn't matter to them.

[N. De Plume]

Why the fuck is it next to impossible for anyone in the financial sector to think about the long haul? Why?

Because they're douchebags

You can have a sensible view of long-term self interest and still be a douchebag, I think.

Using the pie analogy, they don't care about the absolute size of their slice (how can they when it's far too large for any one person to possibly eat?) but its size relative to others.

Yeah, this is obvious. But why is it they care more about what others are getting than they do about their own slice? That is what I am asking.

[TheL]

What the hell? Do they seriously think they will be better off keeping the people that really run the economy down?

No, you see, that would require foresight and the ability to have empathy for others. These buzzards have no empathy and they don't care about anything but increasing their own short term profits.

I’m not even talking about empathy. I’m talking so-called ‘enlightened’ self-interest. A little bit of that actually goes a long way to mimicking empathy if nothing else.

But you nail it when you identify it as short-term thinking. Why the fuck is it next to impossible for anyone in the financial sector to think about the long haul? Why?

Because they already have lots of money so who cares about the future.