Protect Freddie from its own design

National mortgage giant Freddie Mac was created to help make home loans accessible to Americans. But an investigation has found that the taxpayer-owned agency has actually invested heavily in trades that make money only if homeowners don't refinance their burdensome costly mortgages. That's a conflict of interest that has left millions of homeowners stuck, struggling to pay off mortgages whose interest rates are far above current historical lows. Making matters worse, in 2010 Freddie, the Federal Housing Finance Agency, imposed stricter rules and higher fees on borrowers who were refinancing.

This is wrong for millions of strapped borrowers, it's wrong for the housing market, it's wrong for the economy.

U.S. Sen. Robert Casey, D-Pa., is taking a lead in condemning Freddie Mac for a conflict of interest. He has asked the Obama administration to demand the agency halt the investment scheme or develop new strategies to assist millions of their customers who are still struggling with high-interest home mortgage loans. Refinancing at 4 percent or lower could save them thousands every year, money that could in turn infuse new energy into the persistently slow economy.

Reporters from ProPublica and NPR News broke the story, outlining the complex multi-million-dollar investment trading practices and showing how Freddie Mac could make money on them only if borrowers could not refinance. At bottom, homeowners who refinance their mortgages take out a new loan, which pays off the old loan, halting those interest payments. Freddie needs those interest payments to back half of its securities investments, making refinances a huge and unwelcome risk.

Freddie Mac and Fannie Mae, the Federal National Mortgage Association, insure most home mortgage loans. The government bailed out both agencies three years ago, so they're now owned by the taxpayers. The Federal Housing Finance Agency oversees Freddie Mac. FHFA officials said they asked Freddie Mac last year to stop making the contrary investments. Freddie Mac officials aren't talking.

There's nothing illegal about the trades. But they represent an unfortunate echo of the kind of risky trading that private banks and Wall Street investment companies made with bundled mortgages leading up to the financial crisis in 2008.

The magnitude of the problem is colossal. In December, Freddie held more than $663 billion in its mortgage portfolio, lower than 2010 but still a huge risk.

Just when beleaguered taxpayers think investors have learned from past mistakes, the Freddie Mac story, a case of financial déjà vu, is bringing understandable outrage. Elected officials from the president on down should spearhead a new round of regulatory reform. This is not private investors. It's taxpayers' dollars at risk through inherently unfair investment practices.

Source http://www.poconorecord.com