[Vision2020] Freddie Mac: Like Pickpockets and Parsons

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>


------------------------------
January 30, 2012
Treasury Investigates Freddie Mac Investment By SHAILA
DEWAN<http://topics.nytimes.com/top/reference/timestopics/people/d/shaila_dewan/index.html?inline=nyt-per>

The Treasury Department<http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html?inline=nyt-org>is
investigating a report that Freddie
Mac<http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org>,
the mortgage giant, bet against homeowners’ ability to refinance their
loans even as it was making it more difficult for them to do so, Jay
Carney, a White House spokesman, said on Monday.

The report came just as the Obama administration had been escalating its
efforts to push Fannie Mae and Freddie Mac to ease conditions for
homeowners, including those who owe more on their mortgages than their
homes are worth.

Last Friday, the Treasury announced that it would offer increased
incentives to lenders to forgive portions of homeowner debt, saying
pointedly that for the first time the incentives would be offered on loans
held by Fannie and Freddie.

But Fannie and Freddie, which said they would review the increased
incentives, have long declined to allow debt reduction on the loans it
holds or guarantees, saying that it would create unnecessary losses for
taxpayers. The companies, which are financed by taxpayers, have also
maintained barriers to refinancing, like risk-based fees for homeowners,
even as mortgage interest rates have dropped below 4 percent.

In his State of the Union
address<http://topics.nytimes.com/top/reference/timestopics/subjects/s/state_of_the_union_message_us/index.html?inline=nyt-classifier>last
week, President Obama said a new refinancing program would cut through
government red tape. He has yet to provide details of the program.

The Obama administration has tried, with scant results, to persuade Fannie
and Freddie to ease refinancing restrictions and participate in debt
forgiveness programs.

The Federal Reserve, which has made low interest rates a crucial part of
its response to the financial crisis, has also objected to some of the
barriers to refinancing, including fees it has said are unjustified.

On Monday, ProPublica and National Public Radio
reported<http://n.pr/yQNLJm>that Freddie Mac, which maintained
slightly tighter restrictions than
Fannie on homeowners’ eligibility to refinance, had a multibillion-dollar
investment whose value hinged on borrowers continuing to pay higher
interest rates.

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. Fannie and Freddie are supposed to be
decreasing the size of their investment portfolios.

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 issued a statement on Monday defending its commitment to helping
homeowners. “Freddie Mac is actively supporting efforts for borrowers to
realize the benefits of refinancing their mortgages to lower rates,” it
said. The company said refinancing accounted for 78 percent of its loan
purchases in 2011.

Christopher J. Mayer, a real estate professor at Columbia Business School
who has been a proponent of mass refinancing, said he could see little
reason for Freddie to use such a complex investment scheme. “Why are we
three years into the crisis and some of the same kinds of complicated
derivatives<http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier>deals
that brought down some of our biggest financial institutions are
being done by Freddie Mac?” he said.

The Federal Housing Finance Agency, Freddie Mac’s regulator, also had
problems with the deals. Late Monday, the agency said it had reviewed the
inverse floaters last year and had identified “concerns regarding the
controls, including risk management.”

Freddie Mac had already stopped conducting the transactions, and only $5
billion of its $650 billion portfolio was held in inverse floaters, the
statement said. It said that the investments had no bearing on recent
changes, announced last fall, to the Home Affordable Refinance Program, in
which Freddie maintained stricter controls than Fannie on homeowners who
owed less than 80 percent of their homes’ value.

Some have advocated principal reduction as a better way to restore equity
to homeowners, though it is more expensive. The Treasury’s offer on Friday
would triple the incentives paid to lenders that reduce principal, to 18 to
63 cents on the dollar from 6 to 21 cents on the dollar.

Proponents say that reducing principal is the most effective type of loan
modification<http://topics.nytimes.com/your-money/loans/loan-modifications/index.html?inline=nyt-classifier>and
that it would help the housing market and the broader economy by
reducing the $700 billion in negative equity that is weighing down growth.

But Edward J. DeMarco, the acting director of the Federal Housing Finance
Agency, has remained unconvinced that principal reduction is consistent
with the goal of saving taxpayer money that was used to bail out Fannie and
Freddie. Two weeks ago, he wrote in a letter to Congress that principal
reduction would cost $100 billion if every single underwater
government-backed mortgage were adjusted.

Mr. DeMarco noted that reducing principal could reduce losses not for
taxpayers but for third parties, like the holders of secondary loans or
providers of mortgage insurance. “F.H.F.A. would reconsider its conclusions
if other funds become available,” he wrote.

  [image: DCSIMG]


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/vision2020/attachments/20120131/cb9f4de5/attachment-0001.html>