(Image credit: Andrew Harrer/Bloomberg by way of Getty Pictures)
Is Freddie Mac trying to assist home owners–or harm them?
A latest investigation into trades built by the taxpayer-owned mortgage loan giant displays that although Freddie with one hand is aiding consumers get mortgages, it is, with its other, creating those mortgages more difficult to refinance. Consequence: Property owners trying to refinance their way out of substantial-interest mortgages say they feel trapped in “financial jail.”
The investigation–a joint effort amongst Country wide General public Radio and ProPublica, an independent, non-revenue investigative information provider–looked at multibillion-dollar investments created late in 2010 by Freddie. These investments pay out off only if house owners remain locked in large-curiosity mortgages.
Not only do the investments appear to be at odds with Freddie’s community mandate, they improve the size of Freddie’s investment portfolio at a time when the Freddie, beneath the terms and conditions of a 2008 bailout settlement, is intended to be minimizing it. Both Freddie Mac and Fannie Mae ended up bailed out by U.S. taxpayers in 2008 and are now owned by the general public.
The NPR-ProPublica report finds, as well, that Freddie’s new investments have increased the volatility of its portfolio.
Securities owned by Freddie fall into two groups. In one particular are those backed primarily by principal. These pay a very low return but are deemed reduced-risk. The 2nd group holds securities backed by mortgage curiosity repayments only. These pay out a higher charge but are considered riskier, given that, if house owner defaults, Freddie as the insurer need to spend the total worth of the mortgage. Recognized as inverse floaters, these investments are tougher for Freddie to offload onto investors.
In 2010 and 2011, Freddie increased its holdings of inverse floaters by $3.four billion, in accordance to prospectuses for these specials. Curiosity charges on the underlying mortgages run as large asه percent.
In the identical way that it’s not in Freddie’s curiosity to have borrowers default on people mortgages, it’s not in its interest to have them swap to more affordable mortgages, considering that, when a borrower refinances, he pays off the 1st mortgage early, and people juicy interest payments cease.
Freddie therefore has taken measures to make it tougher for homeowners to refinance.
For case in point, in October 2010 it began refusing to insure new loans for house owners who have had a short sale in the prior two to 4 years. (In a quick product sales, a home is marketed for much less than the value of the fundamental mortgage loan.)
That rule alter has strike people like Jay and Bonnie Silverstein of Pennsylvania difficult. Because the Silversteins did a brief sale of their aged property, Freddie now will not support them refinance their new a single, even even though the Silversteins say they haven’t missed a cost. Says Jay Silverstein, who speaks for hundreds of thousands of consumers in his same situation, “We’re in financial jail. We’ve never ever been there prior to.”
report=2012-02-01data
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