Possible, but expensive.
Though the political implications of this disturbing story, which broke today on NPR, are wide-ranging, this isn’t a political blog. I will avoid the temptation to wade into them. That’s fine: the ethical implications are bad enough.
Freddie Mac, the taxpayer-owned mortgage giant, has been doing a Goldman Sachs, betting against the very homeowners it is pledged to serve by making multi-billion-dollar investments that will profit Freddie Mac only if homeowners can’t get out of expensive mortgages with interest rates well above current rates. Of course, Freddie Mac’s job is supposedly to do the opposite…to help homeowners find cheaper, fairer mortgages. And we were told, by the Obama Administration, that this what it was working to do.
This is called a conflict of interest. And since Freddie Mac, along with its cousin Fannie Mae, is owned by U.S. taxpayers, this is also a massive breach of trust by the Federal government. Freddie and Fannie were bailed out in 2008. The companies insure most home loans in the United States, making banks able to lend at lower risk, and the companies’ rules determine whether homeowners can get refinanced and on what terms. Now we know that Freddie Mac, at least, profits when they fail. Remember the indignation of Sen. Carl Levin as he incredulously asked Goldman Sachs executives how they could in good conscience sell their client “crappy products” while their company bet that those products would lose money? Now we know that the Senator’s government permits its gatekeeper for home loans to do the same thing, except that its clients already have the crappy products, crushing mortgages, desperately want to get rid of them, and trust Freddie, and the US government, to be on their side.
Ah, the fools.
According to the coordinated investigation by NPR and Pro Publica, Freddie began increasing its bets against mortgage holders in late 2010, at the same time that the company was making it harder for homeowners to get out of such high-interest mortgages. Coincidence? Freddie Mac’s charter calls for the company to make home loans more accessible, to help, as Charles Haldeman Jr., Freddie’s CEO, recently told Congress, “financially strapped families reduce their mortgage costs through refinancing their mortgages.” But Freddie Mac has also been selling the principal owned on mortgages while keeping the interest owed, meaning that if a mortgage holder gets a fairer mortgage rate, Freddie loses. And Freddie helps determine whether the fairer mortgage rate gets approved. As the report says, “Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.”
Hmmmm.
“We were actually shocked they did this,” the report quotes Scott Simon as saying. He is the head of the giant bond fund PIMCO’s mortgage-backed securities team and one of the world’s biggest mortgage bond traders. “It seemed so out of line with their mission.” The trades “put them squarely against the homeowner,” he added.
Freddie’s refinancing conflict could be stopping millions of strapped homeowners from cutting thousands of dollars a year from their mortgage payments. This, in turn, could not help but boost the entire economy by putting “tens of billions of dollars back in consumers’ pockets, the equivalent of a very long-term tax cut,” according to real-estate economist Christopher Mayer of the Columbia Business School.
So it is obviously crucial that Freddie Mac do its job, and it has not been. The number of refinanced mortgages has been disappointing. Could the conflicting trades, and the fact that Freddie makes more money the fewer mortgagers it helps have something to with it? Well, why would Freddie Mac invest in trades that are dependent on mortgagers staying stuck in their excessive mortgages, if it was determined to get them out of those deals?
And what are the Freddie Mac’s enablers saying? You can guess, can’t you?
“It’s legal.”
Yes, it is.
And it’s wrong.
Post Script: I should make two additional points. 1) The Marshalls have been stuck with one of those crushing mortgages, an 8.9% “jumbo” loan, for almost ten years. We tried to work with the various government re-financing programs when the Administration announced them with great fanfare, and got what certainly appeared to be a runaround. We gave up, after months of wasted time and money,and are trying something else. It’s amazing how paying 6 grand in mortgage payments every month can make it nearly impossible to enjoy life, but I’m thrilled to know that our mortgage is at least making money for Freddie Mac. 2) I have often been critical of NPR for what appears to be a persistently left, Democratic, pro-Obama bias. But this investigation was excellent work, and the story is certainly not favorable to the Administration.
Ethics Alarms 
Freddie Mac: Throwing good (taxpayer) money after bad.
Maybe I should start a small business selling torches and pitchforks. In these troubled times, I’d be selling faster than I could make them. If only there was a trustworthy bank that could give me a startup loan.
MobCo LLC: The elites treat you like a peasant, be an angry peasant!
The name needs some work.
How about “Rocky Fin, P.E.” for RCKEFN, Public Enterprise? (Revolutionary Commerce and Knowledge to End Financial Nihilism)
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This is just another data point that indicates that the entire culture of the investment community is corrupt. You can point to the lack of laws prohibiting it, but it doesn’t make it ethical.
Just because other lenders do it doesn’t make it right. Other lenders are different. If my mortgage company doesn’t want to refinance my 6.75% mortgage, they have no obligation to. I agreed to the terms, which were reasonable at the time. If interest rates had gone up to 9%, they had no right to demand I start paying the higher interest rate. It went down, however, and they make the money they agreed to. Freddie Mac takes money from the US government to help people get lower interest loans. To take the money and then not follow through on the obligation is unethical. It may be legal, but that is because government officials are terrible at writing contracts (if the contractor working on my house lowballs the contract price and runs over on cost, I don’t give him more money). It still is unethical.
In my area, there is a lot of mortgage fraud. I have heard a lot of horror stories and I researched my mortgage company very well. I chose them partially because they keep 90+% of their mortgages. Why does this matter? It means that they make their money on MORTGAGES, not financial scams. Notice that Freddie Mac sold the principal on the mortgages? They didn’t do that at face value, they probably sold them for 60% of the principal owed. Why, because they expect those people to default at a higher rate than that! They are just trying to make up as much as they can on the interest payments and they are not going to let those go down. They have already written off the mortgages at pennies on the dollar and now are trying to squeeze as much as they can out before the mortgages default (which isn’t their problem anymore). If you really want to fix the mortgage crisis, make every mortgage lender keep their mortgages. You will find it harder to get a mortgage, but isn’t it obvious that it should be?
By the way, Jack, sorry to hear about your mortgage. I almost choked when I read it (more like my yearly mortgage payment). You do realize that these programs were only for the irresponsible people, though, don’t you? They are only supposed to reward the people who bought houses they REALLY couldn’t afford. They aren’t supposed to help out people who got mortgages they could afford, but are onerous. I looked at refinancing my house, but the best terms I could get result a payback time of 2025. If I sell the house before then, I lose money on the deal. People who bought much nicer houses (but couldn’t afford them) get sweet deals where they now get to pay less than I do and keep the nice house. My wife keeps asking me why I keep us out of debt and only purchase what we can afford. I really don’t know what to tell her sometimes.
Thanks. The Marshall Mortgage saga is a classic of bad choices and ignorance on our part combined with some bad people, bad advice and bad luck. An IRS agent with an axe to grind slapped a lien on our home when we were at a cash low, and lied to us about the urgency of lifting the lien. (I should have contacted a lawyer.) We were cash strapped, moving from a salaried job to an independently owned business in a new field,and not only had no cash reserves left but had also borrowed heavily. To pay the lien, we had to consolidate debts and refinance,,and because our once A rating was in the sink, could only get a horrible deal. Then our mortgager sold the loan to Countrywide, which began the tricks and tactics that eventually did it in, but not before costing us big time. (The money we paid on the lien? Refunded in full, because, as we said at the time, we didn’t owe it.) Then there were illnesses, hospitalizations and other major expenses, some business reverses, the crash just as the business was getting rolling,, and we have been digging out ever since. But we still have a lot of equity, and there is light at the end of the tunnel. No thanks to Freddie Mac.
Ah yes, the IRS. Whenever I hear things like this I remember an old adage from the cold war. What is the difference between the US and the USSR?
The most feared agency in the USSR is the KGB, the most feared agency in the US is the IRS.