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<div class="timestamp">January 30, 2012</div>
<h1>Treasury Investigates Freddie Mac Investment</h1>
<span><h6 class="byline">By <a rel="author" href="http://topics.nytimes.com/top/reference/timestopics/people/d/shaila_dewan/index.html?inline=nyt-per" title="More Articles by Shaila Dewan" class="meta-per">SHAILA DEWAN</a></h6>
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<p>
The <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html?inline=nyt-org" title="More articles about the U.S. Treasury Department." class="meta-org">Treasury Department</a> is investigating a report that <a href="http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org" title="More information about Freddie Mac" class="meta-org">Freddie Mac</a>,
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
In his <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/s/state_of_the_union_message_us/index.html?inline=nyt-classifier" title="More articles about the State of the Union address." class="meta-classifier">State of the Union address</a>
last week, President Obama said a new refinancing program would cut
through government red tape. He has yet to provide details of the
program. </p>
<p>
The Obama administration has tried, with scant results, to persuade
Fannie and Freddie to ease refinancing restrictions and participate in
debt forgiveness programs. </p>
<p>
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.
</p>
<p>
On Monday, <a title="The report by the news organizations." href="http://n.pr/yQNLJm">ProPublica and National Public Radio reported</a>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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 <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier" title="More articles about derviatives." class="meta-classifier">derivatives</a> deals that brought down some of our biggest financial institutions are being done by Freddie Mac?” he said. </p>
<p>
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.” </p>
<p>
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. </p>
<p>
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. </p>
<p>
Proponents say that reducing principal is the most effective type of <a href="http://topics.nytimes.com/your-money/loans/loan-modifications/index.html?inline=nyt-classifier" title="More articles about loan modifications." class="meta-classifier">loan modification</a>
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. </p>
<p>
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. </p>
<p>
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. </p>
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