Is Freddie Mac Betting Against You?

The Government-Owned Mortgage Company, Freddie Mac who specializes in helping homeowners get affordable mortgages, has reportedly been "betting" against homeowners. The "bet" comes in the form of investing in securities called "inverse floaters" that will receive all the interest payments from specified mortgage-backed securities. Basically, the bet will pay off if people cannot refinance. The shocking thing is that these investments are actually legal.

If people were to pre-pay their old loans and refinance them to receive cheaper new loans, Freddie Mac would lose money. However, the more people that cannot refinance, the more money Freddie makes because it will receive money from these older loans with higher interest payments.

The thing that is causing such an outrage among Americans is that Freddie Mac, and it's counter-part Fannie Mae, are not privately owned entities anymore. They are part of the government since Congress adopted them in 2008. Therefore, these highly offensive investments that Freddie is making to generate profit are using taxpayer dollars. You are paying for them to bet against you. Many Americans are already blaming these companies for the housing boom and the subsequent bust, so adding this bet to the picture does not make for happy citizens.

Popular opinion in the finance world is that the number of foreclosures would drop if Americans could refinance their high-interest rate loans. Freddie Mac is supposed to help with that. They actively campaign to get borrowers to realize the benefits of refinancing. However, this is not profitable for them which is where these bets have come into play. Despite Freddie's activity, though, President Obama himself has recently mentioned his commitment to helping homeowners with their mortgage worries.

In his State of the Union Address, he noted that he will be sending a plan to Congress that would give "ever responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates." Obama even promised that there would be "no more red tape. No more runaround from the banks."

So what do you think? Relief for homeowners is promised, but will it happen? Do you think it should be illegal for this government-owned company to be "betting" against you as a struggling homeowner?

Posted in: congress,freddie mac,investments,obama,refinancing