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Potential Conflicts At Freddie Mac Draw Scrutiny

Feb 9, 2012
Originally published on February 9, 2012 10:24 am

A federal Inspector General's office confirmed Wednesday it is looking into Freddie Mac investments that act as bets against homeowners being able to refinance.

In addition, U.S. senators are expected to probe Freddie Mac's investment practices at a hearing on Capitol Hill on Thursday.

Freddie Mac, based in northern Virginia, is the taxpayer-owned mortgage giant whose public mission is to make homeownership more affordable for Americans.

But a recent investigation by NPR and ProPublica, a nonprofit newsroom, showed that the company, which was chartered by the federal government, has made $5 billion worth of investments that benefit when homeowners are blocked from refinancing their current mortgages to take advantage of today's lower rates.

Freddie Mac is one of the gatekeepers that gets to set the rules by which homeowners are allowed to refinance.

The inspector general for the Federal Housing Finance Agency, which oversees Freddie Mac, issued a statement saying: "We currently have an open evaluation on capital markets, which encompasses this issue. We'll know more when the evaluation is completed."

Sen. Robert Menendez, D-N.J., had sent a letter to the inspector general, saying: "If Freddie Mac stood to benefit from homeowners being trapped in above-market interest rates, are such transactions consistent with their mission?"

Lawmakers are interested in exploring the matter because millions of homeowners are frustrated that they can't lower their mortgage payments by qualifying for today's interest rates — the lowest on record. Some prominent economists estimate that upward of 10 million homeowners are being unfairly blocked from refinancing because of unnecessary restrictions, fees and other frictions within the mortgage industry.

The concern is that in recent years, Freddie has been changing the rules to make it more difficult for homeowners to refinance. At the same time, Freddie placed $5 billion worth of bets that pay off if homeowners stay stuck in higher interest-rate loans.

"It's pretty outrageous — Freddie shouldn't be betting against homeowners to begin with," Menendez told NPR. He is the chairman of the Senate subcommittee on housing.

Both Freddie Mac and its regulator have said a "firewall" separates the investment part of the company from the rule-making part. They say lending policy has not been influenced by the investment portfolio.

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STEVE INSKEEP, HOST:

Some other news we are following up this morning on the financing of the government-controlled mortgage company Freddie Mac. Its investments are under scrutiny later today at a Senate hearing.

Last week, NPR and ProPublica reported on this program that Freddie Mac made billions of dollars of investments that amounted to bets against homeowners refinancing. This week more lawmakers are pressing for answers. And we have more this morning from NPR's Chris Arnold.

CHRIS ARNOLD, BYLINE: Millions of Americans are frustrated that they can't qualify for today's record low interest rates. Freddie Mac is one of the gatekeepers there. And in recent years, Freddie has been making it harder for homeowners to refinance. At the same time, we've reported that by using complex securities, Freddie placed $5 billion worth of bets that pay off if homeowners stay stuck in higher interest rate loans.

SEN. BOB MENENDEZ: It's pretty outrageous. Freddie shouldn't be betting against homeowners to begin with.

ARNOLD: That's Senator Bob Menendez, a Democrat from New Jersey. We spoke to him yesterday. He's calling for an investigation by the Inspector General that oversees Freddie Mac's regulator, the Federal Housing Finance Agency. Menendez says he wants to know whether Freddie's investments influence decisions about who could qualify to refinance.

MENENDEZ: The concerns of losses on the portfolio side may very well have permitted the type of practices that actually hurt homeowners instead of help them. And if in fact this is all the case, then tens of thousands of homeowners could have gone into foreclosure that didn't need to. So that's a very big deal.

ARNOLD: The FHFA Inspector General's Office appears to looking into all this. A spokesperson said in a statement that the IG is conducted a, quote, "open evaluation of capital markets which encompasses this issue." For its part, Freddie Mac and its regulators say that there is a firewall separating the investment side of the company from lending policy. And they say that that policy has not been influenced by the investment portfolio. Still, members of Congress are asking more questions. Republican Senator Johnny Isaacson has said that the trades were, quote, "at best unsavory and at worst immoral." And a group of 10 Democratic senators this week cosigned a letter to Freddie's regulator. Senator Bob Casey says he wants answers about why Freddie made financial bets against homeowners.

SEN. BOB CASEY: Yes, exactly. And even if someone could prove that somehow that practice or that strategy was not inappropriate - and I don't think they can prove that - but even if you can prove that to a certainty, you still should not engage in that practice.

ARNOLD: Casey says that at the very least it just looks so bad that it shakes average Americans' confidence in the system. Clifford Rossi is a former Freddie Mac risk management executive. He's now a professor at the University of Maryland. Rossi says that these trades remind him of a previous blowup back in the 1990s. Freddie Mac then too was backed by the government - though to a lesser degree - and its portfolio traders back then decided to invest hundreds of millions of dollars in the tobacco company Philip Morris.

CLIFFORD ROSSI: Congress caught wind of that and it just was like a, you know, a fire in the movie theater in some sense, and they very quickly moved to unwind, to sell those bonds out.

ARNOLD: That's not to say that Rossi doesn't think there's a real issue here. Rossi says that Fannie Mae and Freddie Mac have giant investment portfolios and those have always created a potential conflict for Fannie and Freddie's overall mission. And he says that with the housing crash and homeowners' current trouble refinancing, that conflict is suddenly a much bigger deal.

ROSSI: I think it just amplifies - that highlights, that is - the nature of these inherent conflicts that exist at the company.

ARNOLD: Those conflicts are coming under greater scrutiny at a Senate banking committee hearing underway this morning. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.