Comments on: Freddie Mac gets paid to obstruct refinancings A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Thu, 02 Feb 2012 05:14:35 +0000 RobinBrownDavis, sorry to say whatever agro you had has nothing to do with this story. The author simply didn’t understand what he was writting. If it makes you feel any better this is apparently normal for him.

By: RobinBrownDavis Thu, 02 Feb 2012 00:39:59 +0000 For 5 years we paid extra on our mortgage with Taylor, Bean, & Whitaker. As a small business owner for 25 years, that was our lame attempt at planning for our retirement. With our good credit history, it was a fluke that we were handed over to sub-prime predators, Ocwen Loan Servicing after the Feds shut down Taylor Bean. Experiencing the abuse of power the cocky Ocwen heaped on top of us, makes sense now. Our paying down our principle was money out of Freddie Mac’s pocket.

Taylor Bean did us no harm. In fact, in April 2009, they sent us a notice saying that our good payment history made us eligible for an interest reduction through a HASP refinance.

When Ocwen took over, all they wanted was for us to apply for HAMP, and then they went to work making sure we had no other alternative. We finally did apply last February because it became our only choice. We were approved, but Ocwen added unjustified fees to our refinanced balance, so our extra Taylor Bean curtailment payments were for nothing.

The .5% reduction to our payment in 2009 would have added $2,400 a year to our budget. How much better would we all be right now if everyone would have gotten that courtesy?

I’m a fighter, not a whiner, but sometimes I let myself feel sorry for a few minutes. It’s not fair that we consumers had to go through such abuse.

I use my website to do most my whining. I’ve posted documents to back up my story as well:

By: Sechel Wed, 01 Feb 2012 11:01:29 +0000 Again, I have to say how disappointed I am at this column and the original source story. Freddie Mac is long major credit exposure in mortgages. That certain mortgages are not refinance able or obtainable is a credit story and Freddie Mac has acted very responsibly in applying prudent lending standards post crisis. That interest rates are declining is government policy and comes from the Federal Reserve. That a wall off trading desk held on to or purchased some exposure to inverse IO’s is not a scandal but merely a judgment that these securities were mis-priced by the market and offered value. This was not inside information, but something every market participant had the opportunity of doing simply by comparing the inverse to the floater and the fixed, or by running an OAS, applying scenario analysis or looking at interest rate floor pricing. Perhaps Eisinger believes Freddie should refinance everyone and ignore any/all risk guidelines, but the we all know that would lead to huge tax payer losses. The sole legitimate discussion is whether Freddie & Fannie should have post-conservator any retained portfolio.

By: Danny_Black Wed, 01 Feb 2012 07:23:21 +0000 Firstly, I note you that keep switching from the size in these trades but when claiming that freddie ramped up the trades you suddenly go from size of trades to number of trades. This is something you have form for, for instance with the CDO [non]”story”. Are these lots of small trades vs a few large ones? What was the investment background to such trades?

Secondly, inverse floaters are not a direct bet on prepayment, they are a leveraged bet that interest rates are not going down and probably going up. There is – or at was – a relatively well understood statistical correlations between interest rates moves and prepays for ***PRIME*** borrowers – which the sop story you picked are not. A brief look at what was going on in the world between autumn 2010 and spring 2011 might offer a simpler reason to bet that in the mid term rates might go up. There was the bailout of Ireland, there was austerity passed for Portugal and Greece, US economy was doing well, the “Worlds largest market(TM)” seemed to booming, there was stability in the Middle East and also operation TWIST was ongoing at the time( from recollection, at EXACTLY the same time in question ). All of that came to an end around the same time the FHFA intervened – according to you.

Thirdly, you claim a causual link between the couple you interviewed and this trade. Was there mortgage part of that block? Can you show that actually Frannie stood to make money by “blocking their refi”? Or did you just go out, find the nearest refi sop story and fabricate a link?

Fourthly, while the context is important is because you don’t know what the counterbalancing risks are in the portfolio.

Fifthly, so your suggestion is that Freddie, rather than simply selling over most of the transaction and getting cash – yummy – should KEEP the transactions and spend MORE cash getting a swaption, which will either be custom and so cost alot of money and be illiquid. Or it will be vanilla, have basis risk and roll-over risk. Not to mention Frannie now have counterparty exposure whereas before before they didn’t. All to get the same risk profile?

As said before, I don’t usually read your crap because what i have read is obviously crap – you compete with the Bloomberg FED team for consistently worst financial “journalist” in the world – and maybe I am missing out on all the insightful, nuanced stories you write showing a deep understanding of the subject and an uncompromising commitment to fact checking but somehow I doubt it.

By: JesseEisinger Wed, 01 Feb 2012 03:37:47 +0000 We are glad to see that our Freddie Mac story has sparked a lot of discussion.

We wanted to respond to some of the critiques.

First, though some bloggers see nothing wrong with these trades, the FHFA did. They had them stopped. And there is a lot we still don’t know from the agency’s statement. Why did the agency stop the trades? What were its concerns about Freddie’s risk management? In all the critiques, we have seen little engagement with this FHFA statement, which essentially confirms our story, while saying that Freddie had an even greater amount of inverse floaters than we had reported.

Several bloggers, even the critics, have also agreed with the central premise of the story: That Freddie (like Fannie) has an enormous conflict of interest between helping homeowners and maintaining the value of its investment portfolios. With these trades, we wrote, Freddie exacerbated that conflict.

Naked Capitalism’s Susan Webber (who writes under the nom de plume Yves Smith) says we have the “wrongheaded premise that retaining the inverse floater is unusual.” We flat out never said that. Quite the contrary, we wrote that these kinds of securitizations have been around for decades — hardly an indication that “retaining the inverse floater is unusual.”

The point that Webber misses is this: Freddie’s retention of inverse floaters ramped up dramatically in late 2010 through spring 2011. Freddie purchased inverse floater portions of 29 deals in 2010 and 2011, with 26 bought between October 2010 and April 2011. That compares with seven for all of 2009 and five in 2008.

It’s not the retention of the floater that’s unusual (a word we didn’t use). It’s the dramatic increase in these deals by Freddie Mac that is noteworthy.

Some people have raised the point that there is a difference if Freddie “retained” these inverse floaters instead of “bought” them. But we reported that Freddie retained these positions and the graphic, though simplified, says the same.

Our story says this:

“One portion is backed mainly by principal, pays a low return, and was sold to investors who wanted a safe place to park their money. The other part, the inverse floater, is backed mainly by the interest payments on the mortgages, such as the high rate that the Silversteins pay. So this portion of the security can pay a much higher return, and this is what Freddie retained. (Our emphasis)”

Naked Capitalism goes wrong when she discusses how hard it is to sell inverse floaters. Yes, it’s hard. But that’s not what Freddie started with. It started with mortgage-backed securities.

It could have sold MBS on its portfolio outright and rid itself of the prepayment risk. The market for simple MBS with a government guarantee attached is liquid and deep – and certainly was then, in late 2010 and early 2011 when Freddie’s inverse floater bets ramped up.

Instead Freddie had the securitization structured, then retained the inverse floater portions. In other words, Freddie undertook transactions in which it retained a piece of a newly created deal that has basically the same risk profile as the original holdings. And what Freddie retained carried new risks: liquidity and LIBOR risks. Freddie engaged in reverse alchemy: it turned a position of gold into lead.

Moreover, these trades didn’t happen in a vacuum. Freddie is under a mandate to sell down its portfolio. Implicit in that mandate is that Freddie reduce its risk. In these trades, Freddie sells something notionally, so that the assets on its balance sheet fall, but it keeps most of the risk — and adds new risk. That raises the question of whether it is subverting the spirit, if not the letter, of its agreement with the U.S. Treasury. In Freddie’s defense, as we reported, its portfolio is “well below the cap of $729 billion required by its government takeover agreement.”

As for the point that Freddie has a large portfolio and we cannot know what other risks are there, or how it’s being managed, that strikes us as a bizarre defense. The company retained these positions. Its now-smaller portfolio is now even more levered to prepayments because of these inverse floaters.

As always, we welcome any and all responses from Freddie that clarify these matters. All others are speculating.

Regardless of the portfolio’s overall size, Freddie essentially placed $5 billion in bets that homeowners wouldn’t prepay through deals involving a much larger pool of mortgages worth more than $20 billion. We’re talking about tens of thousands of home loans wrapped up in these investments. We raise the question: Is that an appropriate bet for a government-run company to be making, especially when it is a gate-keeper on refi eligibility?

As far as the argument that perhaps these inverse floaters were used to hedge other risks in Freddie’s portfolio, bond traders we spoke with say that Freddie could have easily bought options or swaptions to hedge its prepayment and/or interest rate risk. Entering into inverse floaters as a hedge – or to offset a hedge – seemed to these traders to be cumbersome and expensive for Freddie. One said comparing inverse floaters to hedging tools is not just apples and oranges – it’s more like apples and cars. They just have nothing to do with each other.

Finally, some people, such as Matt DeBord, seem to have missed a big point about the Silversteins, the homeowners we profiled in our story. Yes, they did a short sale and have worse credit for that. If they applied for a new loan, a lender should evaluate that.

But this is a refi. Freddie – which means you and I as taxpayers – owns the credit risk. The government guarantees their mortgage already. There seems to be little reason why borrowers who are current on their mortgages shouldn’t have easier access to refinancings, especially when that would only reduce their credit risk to the insurer – in other words, to the taxpayer.

But Freddie did inhibit refinancings and did have an incentive to inhibit them: its short-term profits on the inverse floaters. As we reported, no evidence has emerged that Freddie’s decisions to limit access to refinancings were coordinated with its decisions to retain the inverse floaters, and Freddie denies that they were coordinated.

We welcome more discussion of this. Thanks to the people who have commented on our story.

-Jesse Eisinger

By: TFF Wed, 01 Feb 2012 02:56:52 +0000 y2kurtus, the federal student loans have produced a whole industry of no-value for-profit colleges designed specifically to feed off them. Would direct mortgages be any better?

By: y2kurtus Wed, 01 Feb 2012 02:05:01 +0000 I think I know how this will end. What if the goverment used fannie and freddie to make loans directly. They did something similar with student loans.

They could then openly use the GSE’s as a tool to dial up or down the economy just like the fed uses short term interest rates. Want to slow things down when the economy is a little too hot… up the required down payment by a point or two. Want to heat the economy up when things are slow… let people re-fi with no cash out up to 95% LTV.

The trick is they will have to reduce the default rates by making all fed backed home loans full recourse and bankrupcy proof like fed student loans are. Fall behind and they garnish wages… withhold tax refunds… even a peice of social security payments if it goes that far. It would still be a good deal for the 90% of consumers who pay their bills. Based on the 10 year T-bill they could probably offer a 3% 30 year home loan to someone who had good credit and 50% equity.

By: Sechel Wed, 01 Feb 2012 00:49:16 +0000 This is pure supposition, but this strikes me as a smear campaign against Demarco for not advancing administration housing policy. And ironically as conservator, he’s doing exactly what he should be doing.

By: kidlugan Tue, 31 Jan 2012 22:44:54 +0000 ropublicas-off-base-charges-about-freddi e-macs-mortgage-bets.html

Interesting take.

By: Danny_Black Tue, 31 Jan 2012 21:17:46 +0000 realist50, journalism 101. Find some people whose life has been “ruined” by the never ending search for profits. Need to fire up that outrage, if it requires fabricating a story about a hedge and throwing in a couple of property speculators who are a bad credit risk and so cannot refinance and some tenuous link with a rich finance guy [boo, hiss] then it is not like integrity or honesty or even cursory knowledge is even a base requirement for working in journalism these days…. Propublica got dem pageviews to sell.