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.

prokop / PHOTOCASE source

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.

Did you enjoy this article? Yes No
Oops! What was wrong? Please let us know.

Ask a Question

  • MIker9

    Freddie Mac and Fannie Mae advising the public about ANYTHING is a JOKE. They are a government-created SCAM on American taxpayers.

  • Sundfarm

    The opening line of this article would be funny if it wasn’t so pathetic.  What makes you think that Freddi Mac is being maligned by Republicans and blamed erroneously…yet, you see them doing this now?  Can you not get from A to B and figure out that this is the game they’ve played all along?  They’ve sucked the life out of the government treasury and the American taxpayer under the pretense of “helping” while creating a phony mortage market, supported by government guarantees that cost more than the original loans.  Leaving us all holding the bag…all the while knowing most of the mortgages were never going to be repaid. 

    Whoever saw that before and whoever sees it now, gets it.  Anyone that tries to split this hair to fit their idealogy needs to be introduced to Barney Frank (D) NY and then try and tell us the problem is picking on Fraddie Mac by the Repubs.  Assininery….if that’s a word…if not…it should be.

    • Though Fannie and Freddie pioneered the practice of creating mortgage-backed securities, it was privately-owned and operated investment banks that got out of control with it in the 00’s. Fannie and Freddie are easy to point fingers at because we all know that their sole purpose is to encourage mortgage lending by buying mortgages from lenders, and because Republicans have completely perverted people’s understanding of what the Community Reinvestment Act actually is and does. 

      Investment banks do all sorts of stuff. Their reason for being does not appear to relate directly to the mortgage crisis in the way that Fannie and Freddie’s do. But one thing they did way more of than the GSEs in the 00’s was securitize mortgages, and mask risks inherent to subprime lending. Way more. 

      What Freddie Mac is doing now is irresponsible, but not in the same way investment banks were irresponsible last decade. 

      Assininery isn’t a word, and Barney Frank represents Massachusetts. 

      • Jesse G

        Banks were following the guidelines presented to them.

      • Here we see yet another person who’s either woefully misinformed or, more likely, spouting the same propaganda.  What the Community Reinvestment Act is and does is simple:  It forces lenders to loan to people who have either no ability or no intention – often both – of paying the loan off.  It, along with the GSEs Freddie and Fanny, allowed the creation of massive amounts of toxic debt which was then laundered through the complex derivatives which were only necessary due to the fact the government forced lenders to make the bad loans – and Obama was DIRECTLY involved in this process with ACORN – and, naturally, the whole thing eventually had to come crashing down.  Naturally some people who want to continue to ignore the real source of the problem, because it cuts directly into their most cherished beliefs to fail to do so, will scapegoat the investment banks.  But, extending that logic, the real parties at fault are the union pension plans and such who wound up getting greedy and buying all that  toxic debt thinking they would make a killing doing so, right?

        I prefer to blame the government for forcing the creation of the bad debt in the first place, then Freddie and Fannie for criminally laundering it.  The problem won’t be solved until the government is taken to task for it’s misbehavior, which likely will not happen.  

        The funny thing is this, along with the S&L crisis, were not instances where capitalism failed but rather where government interfered in capitalism by trying to force socialist concepts into the mix which, of course, made a mess.  Yet of course those who are convinced socialism will work if we’ll just try it one more time still refuse to admit they’re wrong.

        And yes, Frank was a representative of MA, not NY.  At least you got that right.

        • Baron

          Entirely wrong about the Community Reinvestment act “forcing people who either have no ability or no intention — often both– of paying the loan off”. Bull!  The problem with that Obama legislation was that it was the opposite:  there was NO TEETH to it!  Banks/Freddie/Fannie knew they did not have to lend, so they didn’t!  No penalties at all. Meanwhile, folks who could have benefitted & held onto their homes were tossed out onto the street. 
          Also, you do realize that people did not get a choice in doing business with Freddie or Fannie,right?  I still have no idea how one of these came into our mortgage picture; I certainly did not need them nor ask for them.  I had a low, 30-year fixed rate which was with WAMU that later got sold to another heinous bank (which is where I believe I came into contact with 1 of these govt mortgage associations.  Did I get a choice to refuse?  No.  Stop blaming ALL of the people for freeloading!  Some of us played by the rules & got hosed.

          • Mikey in MA

            This story is complete rubbish. Freddy and Fanny were a vehicle used by the Dems, I mean pushed vigorously (no pun) by Dems including that pervert Barney Frank, in the last 10-20 years and was abused leading to the crash in 2006-2007. Behind the scenes Obama has been wanting to put pressure on the guy who came in to clean up Freddy’s Fannie. BHO wants to strong arm this high ranking civil servant to lower the rates. The reason: simple if they lower the interest rates, you the taxpayer will now owe more for the lost earned income. It is a backdoor for Obama to get his much sought after TAX HIKE instead of allowing us to tap some of the huge reserves that is all around us; to the north, south, east and west of us.

  • As soon as I read ”
    Freddie Mac, frequently and wrongly blamed for the housing crisis by misinformed Republicans” I knew this was either a piece by a woefully misinformed person or a deliberate liar and stopped reading.

  • I meant “fail to do so”, of course.  Probably won’t even notice, but just in case.

  • Frankshea

    I’m from the Government, and I’m here to help.

  • Done with it

    They wouldn’t help us at all with loan modification.  We had to apply four times while our loan was sold, and resold, and then it just a flat “No, we won’t help you.”  No reason, no alternatives.  We’ve given up the house in bankruptcy now.  Anxious to see what they do with it.