Just one week after President Obama promised "no more red tape" for homeowners looking to refinance, there's news that mortgage insurance giant Freddie Mac could benefit if banks stonewall their customers.
According to an investigation by NPR and ProPublica, the government-sponsored enterprise has spent billions betting homeowners won't be able to refinance their high-rate mortgages -- and taking some steps to make sure they're right. While the investment arm of the company was profiting from homeowners with high-rate mortgages, Freddie was making it more difficult for those locked in high-interest mortgages to refinance to a lower rate.
Freddie and its larger cousin Fannie Mae have imposed new rules and regulations, and introduced new fees, effectively narrowing the number of borrowers who qualify for a Freddie-insured mortgage.
How is this possible? The investigation suggests the investment arm is betting homeowners won't be able to refinance, while the credit side is making sure lenders have enough money to make loans. The Federal Housing Financing Agency (FHFA) says a wall exists between the investment and credit sides of Freddie.
And in a critique of the ProPublica story, Forbes columnist Daniel Fisher points out that the Freddie Mac investment was a reasonable bet based on current market conditions. What's more, Freddie's $3.4 billion investment is less than 1 percent of its $663 billion portfolio, so the bet won't move the needle much, however it pans out.
NPR and ProPublica say that in 2010 and 2011, Freddie Mac -- which is controlled by the Federal Housing Financing Agency (FHFA) -- invested in mortgage securities that appreciate when homeowners trapped in high-interest loans are unable to qualify for a refinance. When homeowners are able to refinance and their loans drop out of the securities Freddie has invested in, the securities decline in value.
Scott Simon, managing director of the mortgage-backed securities team at bond trading and investment firm PIMCO, says this puts Freddie Mac "squarely on the opposite side of the homeowner. So if the homeowner lost and was unable to refinance they win, and if the homeowner can refinance, they lose."
All this, despite a mission to make lending more available to consumers.
Brad German, a spokesman for Freddie Mac, says: "There is no question that borrower who meet the requirements should be able to refinance, but lenders are tightening credit for their own reasons."
"Refinancing," German added, "is Freddie Mac's bread and butter in today's marketplace. Refinancing mortgages was 74 percent of our business in 2011 and 80 percent of our business in 2009 and 2010. In three years we refinanced more than 4 million mortgages totaling $855 billion."
There's been discussion around how to pull the influence of Freddie out of the mortgage market to make room for private capital, but it's tough to tell if and when that will happen. Private investors are still gun shy when it comes to investing in mortgages, so if the government sponsored entities were to back out, mortgage rates would probably spike. According to HousingWire, Freddie Mac ended the year with a total mortgage portfolio valued at a $2.08 trillion.NPR and ProPublica contributed to this report.