Freddie Mac Was Wrong to Bet Against Homeowners

In his State of the Union speech at the Capitol last week and in a follow-up appearance Wednesday in nearby Virginia, President Barack Obama touted new administration initiatives to help hard-pressed homeowners refinance their mortgages and ease the pressure on their family finances.

"But I'll be honest," he told people at the James Lee Community Center in Falls Church, "the programs we put forward (in the past) haven't worked at the scale that we hoped."

One reason they haven't might be that some elements of the federal housing bureaucracy kept them from working. Obama and Congress need to make sure that stops.

An in-depth investigative report released Monday by the ProPublica news organization and National Public Radio revealed that the Federal Home Loan Mortgage Corporation — known as Freddie Mac — stood to profit if homeowners were prevented from refinancing mortgages at lower rates.

In 2010 and 2011, Freddie Mac amassed at least $5 billion in complex investments called "inverse floaters" backed by some $20 billion in home mortgages. Inverse floaters are created by separating the principal part of mortgages from the interest part. Freddie Mac sold off the principal portions and kept the higher-risk interest portions — inverse floaters — on mortgages bearing interest rates of around 7 percent. Mortgage holders would save money if they refinanced at today's lower rates, and the economy would benefit. But Freddie Mac would lose money on the inverse floaters.

At the same time that Freddie Mac's investment division was expanding its portfolio of inverse floaters, its mortgage division was making it harder for people to refinance and take advantage of historically low interest rates.

As a result, responsible homeowners who still had good credit and were up to date on their mortgage payments — even though the market value of their homes had plunged when the housing bubble burst — found themselves trapped with high interest rates.

By fall 2011, the Federal Housing Finance Agency, which oversees Freddie Mac's operations, became concerned about the risks of inverse floaters.

In October, Freddie Mac lifted some of the obstacles to mortgage refinancing. It eliminated some fees, eased some of the qualifications criteria and extended the deadline for participation in the administration's Home Affordable Refinance Program through the end of 2013.

In a statement issued earlier this week, the FHFA said Freddie Mac's mortgage policies are not affected by judgments about investments, including inverse floaters.

Please excuse our skepticism on that one.

Freddie Mac and, earlier, the Federal National Mortgage Association (known as Fannie Mae) were created by acts of Congress to help build a stable housing market and promote home ownership by assuring lenders of a secondary market that reduced the risk of issuing mortgages. They were independent from direct government control, and their stocks were publicly traded until the reckless financial practices of 2007 and 2008 brought the economy to the edge of global collapse.

Billions of federal dollars saved the two entities from bankruptcy and put them into a conservatorship overseen by the FHFA, itself an independent agency beyond the direct control of either Congress or the president.

As the ProPublica-NPR investigation demonstrates, Freddie Mac still is not serving the best interests of the American people or the American economy, which desperately needs a revived housing market.

In the short term, Obama can find ways around some of these problems, but he needs cooperation from Congress to solve others.

On Wednesday, House Speaker John Boehner, R-Ohio, restated the Republican position that the housing market should be allowed to fall until it hits bottom. The human and economic damage that would occur as a result apparently would be an acceptable part of the process.

Other legislators are not so sanguine. U.S. Sens. Johnny Isakson, R-Ga., and Barbara Boxer, D-Calif., are working on bipartisan legislation that would help. Their bill and the president's proposals actually might make a difference, but election-year politics don't leave us optimistic.

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