According to a recent investigation, since at least 2010, the mortgage giant Freddie Mac has ironically been betting against homeowners by investing billions of dollars in securities that lose value when homeowners refinance. To state it conversely, Freddie makes money by actually keeping homeowners trapped in higher-interest loans. Considering that Freddie Mac was created to help consumers secure mortgages, there is clearly a conflict of interest between its purpose and its investments.
Due to these newly discovered securities, the enterprise profits as borrowers continue to pay their high-interest payments from their original mortgage. When these individuals refinance into cheaper loans, they pay off their first loan early, causing Freddie to lose this source of revenue (the valuable interest payments). To hinder refinancing, Freddie has implemented a number of new rules and regulations, including "high introduction fees and strict requirements on who qualifies for a Freddie-insured mortgage."
It is definitely not in Freddie's interest (no pun intended) for the borrowers to default on their loans, yet, as briefly aforementioned, it also does not benefit Freddie when borrowers shift to less expensive mortgages.
I think this revelation will cut deeply into the public's trust of such groups, which may translate into increased distrust of the government. It may also be used by the GOP candidates as ammunition against Obama, for not only did this happen under his watch (--> retrospective voting), but he did also promise reform in this area during his SOTU address.
If you'd like to learn more in detail about how Freddie Mac works or its questionable investments, here's the URL upon which I based this post: http://www.thenewamerican.com/economy/sectors-mainmenu-46/10713-freddie-mac-bets-against-homeowners-and-refinancing.
Tuesday, January 31, 2012
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2 comments:
Although I can see why Freddie Mac would want people not to refinance so they can profit from older, high interest payments, it is wrong that they are hurting homeowners when they were created to help homeowners to secure mortgages. Due to this recent news, I figure that the GOP would use this to attack Obama in the nearing election as mentioned by Jeremy; however, if Obama can mention this problem and provide a solution he should be alright. I also wonder how Congress is going to respond to this. Are they going to impose restriction and regulations? Or are they going to do nothing and let Freddie Mac to fix itself?
I think that it is smart for Freddie Mac to do this. At this point it's evident that many people will not be able to refinance their loans and so they intend to make money on those people. Then they will take the money, pocket a little on the side, and then invest it into helping homeowners. There is a surplus of irresponsible people who take out mortgages that they are not able to repay so the earning potential is high. Now although the GOP can pin this on Obama like Alex and Jeremy said, it is in their interest not to because its more laze fair oriented (something that Republicans tend to support) so if anything the Republicans will smile off on the sideline while Freddie takes advantage of people's misfortunes. I think that if anything Obama will try to fix this and the Republicans will question his leadership ability.
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