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Money Minute: Freddie bets against homeowners [Video]

January 31, 2012|By David Lazarus

Is Freddie Mac, the taxpayer-owned mortgage company, betting against homeowners? The Treasury Department has launched an investigation into that very question.

The probe comes after a report from ProPublica and NPR showing that Freddie has invested billions of dollars betting that U.S. homeowners won't be able to refinance their mortgages at today's lower rates.

In essence, Freddie has been hedging its risk by purchasing what's known as "inverse floater" securities -- an investment in homeowners' interest payments. Freddie thus has a financial stake in keeping people interest rates high.

That seems to fly in the face of Freddie's stated mission of providing affordable loans to people.

Freddie Mac, formally called the Federal Home Loan Mortgage Corp., was chartered by Congress in 1970. It says it has "a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership." The company is owned by U.S. taxpayers and overseen by the Federal Housing Finance Agency.

If nothing else, this highlights the ethical problems surrounding the sale of people's mortgages as an investment vehicle. Investors don't want losses, so they'd naturally oppose any reduction in interest or principal.

That's not the best way to keep a roof over people's heads.

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