Freddie Mac Bets against Certain Refinancing

The U.S. Treasury Department has launched an official probe of mortgage giant, Freddie Mac’s alleged practice of purchasing “inverse floaters” which are collateralized based on the difference between the market rate and the mortgage rates on mortgages a securitized bundle. Most of the bundled securities in groups reportedly purchased by Freddie Mac in 2010 and 2011 have interest rates between 6.5% and 7%.  If these mortgages were to be refinanced, Freddie Mac would take a hit. The practice was brought to light last week in a news broadcast by NPR and ProPublica.

Investigators claim that there is a conflict of interest between Freddie Mac’s role in guaranteeing mortgage credit risk and in essentially betting against homeowners being able to refinance, although the practice is not illegal.  The position makes Freddie Mac unlikely to want to accept a refinance request from one of the higher rate mortgages that it currently owns. Freddie Mac maintains that the investment side of its business has nothing to do with its mortgage business.

The FHFA maintains Freddie Mac ceased purchasing inverse floaters in 2011 and that its portfolio of these securities has been reduced to $5 billion out of a $650 billion total portfolio.

Freddie Mac officials maintain that the GSE is on board with the expanded refinance program and point out that 78% of the loans it purchased last year were refinanced loans.