The government has kept home interest rates extraordinarily low over the past couple years. This should makes it cheaper for folks to get a home purchase loan in Dallas, Austin, and Houston. Emphasis on “Should.”
Non-profit investigative journalism outfit ProPublica teamed up with NPR to blow the lid off of what might be the latest scandal the exasperating folks at Freddie Mac — one that might be making such cheap home refinance loans more difficult to get.
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
[...] But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.
“We were actually shocked they did this,” says Scott Simon, who as the head of the giant bond fund PIMCO’s mortgage-backed securities team is one of the world’s biggest mortgage bond traders. “It seemed so out of line with their mission.” The trades “put them squarely against the homeowner,” he says.
In other words, Freddie Mac is supposed to be helping homeowners refinance their mortgages to take advantage of today’s rock-bottom interest rates like a government agency. But they’re also supposed to make money like a company, and we’ve essentially placed bets against those homeowners ever paying off their loans (similar to millions of “bets” placed by Wall St. on subprime mortgage securities). This meant that helping homeowners refinance would run directly counter to their own financial interests.
To understand this, it’s important to understand how Fannie and Freddie work.
As we described last week, the federal government has been using Fannie and Freddie to make it vastly easier for Americans to get home loans. The reason is pretty straightforward:
Consider a standard 30-year fixed-rate loan. If a bank or lender had to wait three decades to recoup the entire loan amount, it would be difficult to have more than a handful of outstanding loans at any one time. Interest rates would need to be much, much higher if the lenders wanted to be profitable at all. To address this problem and make the American dream possible for more Americans, the government has basically began the vast majority of all outstanding loans from lenders and banks through Fannie and Freddie, which allows lenders to keep lending.
But Fannie and Freddie are also designed as corporations that, like all companies, need to be profitable. So their dual missions often clash.
As government-backed companies, Fannie and Freddie make up an unusual private/public mix — and in many ways, they embody some of the worst characteristics of both private industry and government agencies. The companies combine private industry’s drive for profits and willingness to take risks with government impunity, inefficiency, and vulnerability to political decision-making. (Check out the excellent podcast Planet Money did explaining how Fannie and Freddie get bipartisan protection in congress).
So in this case, Fannie and Freddie have both loan officers who are tasked with helping Americans refinance and traders tasked with making the company profitable. The company claims that traders and loan officers are “walled off” from each other, but it seems implausible that the company’s financial needs wouldn’t hold significant sway on other parts of the company — especially since the bets made by traders coincided with new rules that made refinancing more difficult.
Defenders of Freddie suggest that the agency says the criticisms don’t add up and Freddie might have just been absorbing refinancing risk (read more about them here). It’s plausible. But we don’t know at this point. Regardless, it’s made it difficult for homeowners to refinance their homes and use that cash somewhere else.
Here at TexasLending.com, we’re proud to make Dallas home refinances, Austin home refinances, and Houston home refinances accessible and affordable. Our mission is you and you alone. No tricks. No politics.