Tuesday, January 31, 2012

More Corruption in the Housing Market

"Treasury Investigates Freddie Mac Investment" By SHAILA DEWAN Published: January 30, 2012 the New York Times

[excerpted] "The Treasury Department is investigating a report that Freddie Mac, the mortgage giant, bet against homeowners’ ability to refinance their loans even as it was making it more difficult for them to do so, Jay Carney, a White House spokesman, said on Monday..."

read the article here: http://www.nytimes.com/2012/01/31/business/freddie-mac-investments-under-scrutiny-by-treasury-dept.html?_r=1&nl=todaysheadlines&emc=tha25

The issue here is that Freddie Mac was betting against customers it had a mission to serve while making it difficult for those customers to successfully keep their homes.

The New York Times cites an investigation by Propublica and NPR. However, the Propublica story does not go into the specific details of the type of security used by Freddie Mac to bet that homeowners would not be able to refinance and therefore would lose their homes:

Here is what Propublica states: "Public documents, checked by NPR and ProPublica, show that in 2010 and 2011, Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing"

The article does name, but fails to explicate, the investments as "inverse floaters" and states that Freddie holds $5 billion of these still.

Investopedia defines inverse floaters: "A bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate. An inverse floater adjusts its coupon payment as the interest rate changes. When the interest rate goes up the coupon payment rate will go down because the interest rate is deducted from the coupon payment. A higher interest rate means more is deducted, thus less is paid to the holder..."
Read more: http://www.investopedia.com/terms/i/inversefloater.asp#ixzz1l3JlWRFz

New York University provides a detailed article here on inverse floaters: http://people.stern.nyu.edu/eelton/debt_inst_class/Floaters%20&%20Inverse%20Floater.pdf

The best quick analysis of this latest scandal can be found here: http://dealbreaker.com/2012/01/freddie-mac-profits-from-the-misery-of-american-homeowners-so-that-banks-dont-have-to/

The broader implication is that another institution designed to serve the public has subordinated its mission to the acquisition of wealth for private interests and, in so doing, has contributed to the ongoing problem of home foreclosures and a deflating real estate market.

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