Freddie Mac caught betting against homeowners!

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Tue, Jan 31, 2012 - 8:38am
#1
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JuanGalt
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Freddie Mac caught betting against homeowners!

LOL, you can't even make this stuff up. Yet another example of reality being more bizarre than fiction.

http://www.npr.org/2012/01/30/145995636/freddie-mac-betting-against-struggling-homeowners

By the way, Newt Gingrich was a big-time lobbiest for these crooks no matter how he tries to spin it!

JG

Tue, Jan 31, 2012 - 12:51pm
#2
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Should I Be Surprised?

JuanGalt, should I be surprised to see you posting about this?

Freddie Mac isn't really actively causing a homeowner to default. They're insuring against it with other investments and profiting if they do, to offset against loss.

Now should Fannie and Freddie exist? Of course not. Look at the mess they've cost us. (And why should their executives get big bonuses when there are thousands of out-of-work executives who could do the SAME THING for far less money? Heck, government bureaucrats are in charge of tens of thousands of employees and oversee hundred-billion-dollar budgets, and you don't see them each making millions per year.)

But hedging or insuring against loss? You might as well tell a farmer who grows crops not to make a hedge bet against the price of corn, or a person who owns a stock not to sell options on that same stock..

Poet

Tue, Jan 31, 2012 - 2:37pm
(Reply to #2) #3
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Poet, did you actually read the article?

Freddie Mac (FM) is a government sponsored entreprise (GSE) backed by taxpayer dollars with the public mission/mandate of assisting homeowners with their mortgage needs. Betting on the opposite is a conflict of interest, wouldn't you say?

It's not a private entreprise investing with only their money. While rates lower qualifications for mortgages become stricter to the point that even good solid borrowers have an extremely difficult time obtaining mortgage financing. Is there not irony that FM bets on securities that benefit from these stricter guidelines despite its public mandate?

What were the taxpayer funds, loans and bailouts for? To bet against the public in the private sector? I'd have no problem if this were a private entity operating with their own money and not serving a gov't role. However, it is a bankrupt entity that should have been allowed to fail as opposed to bailed out but rather was and continues to be funded with taxpayer funds inspite of its incompetence and gross corruption.

 What do you think of this hypothetical example? Particularly, point #3:

This hypothetical example may help explain what happens:

1) Freddie Mac takes, say, $1 billion worth of home loans and packages them. With the help of a Wall Street banker, it can then slice off parts of the bundle to create different investment securities, some riskier than others. The slices could be set up so that, say, $900 million worth are relatively safe investments, based upon homeowners paying the principal on their mortgages.

2) But the one remaining slice, worth $100 million, is the riskiest part. Freddie retains that slice, known as an "inverse floater," which receives all of the interest payments from the entire $1 billion worth of mortgages.

3) That riskiest investment pays out a lucrative stream of interest payments. But Freddie's slice also has all the so-called "pre-payment risk" associated with that $1 billion worth of loans. So if lots of people "pre-pay" their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can't refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.

I don't understand how you can not find an issue with Freddie Mac's operations, especially in light of these additional activities.

JG

Tue, Jan 31, 2012 - 2:56pm
(Reply to #3) #4
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Does Their Betting Save The Taxpayer Some Money

JuanGalt

Yes, I did read the article. And I do believe they should not have existed and should not have been bailed out in the first place.

But if the government (and therefore we taxpayers) has already bailed them out and is in the hook to make up all these losses, then they might as well make bets to hedge gainst those losses. Hopefully their hedges will reduce the amount out continuing bail-outs they are getting.

A bet like that doesn't cause a homeowner to stop paying on their existing mortgage or refinance, does it?

Poet

JuanGalt wrote:

Freddie Mac (FM) is a government sponsored entreprise (GSE) backed by taxpayer dollars with the public mission/mandate of assisting homeowners with their mortgage needs. Betting on the opposite is a conflict of interest, wouldn't you say?

It's not a private entreprise investing with only their money. While rates lower qualifications for mortgages become stricter to the point that even good solid borrowers have an extremely difficult time obtaining mortgage financing. Is there not irony that FM bets on securities that benefit from these stricter guidelines despite its public mandate?

What were the taxpayer funds, loans and bailouts for? To bet against the public in the private sector? I'd have no problem if this were a private entity operating with their own money and not serving a gov't role. However, it is a bankrupt entity that should have been allowed to fail as opposed to bailed out but rather was and continues to be funded with taxpayer funds inspite of its incompetence and gross corruption.

 What do you think of this hypothetical example? Particularly, point #3:

This hypothetical example may help explain what happens:

1) Freddie Mac takes, say, $1 billion worth of home loans and packages them. With the help of a Wall Street banker, it can then slice off parts of the bundle to create different investment securities, some riskier than others. The slices could be set up so that, say, $900 million worth are relatively safe investments, based upon homeowners paying the principal on their mortgages.

2) But the one remaining slice, worth $100 million, is the riskiest part. Freddie retains that slice, known as an "inverse floater," which receives all of the interest payments from the entire $1 billion worth of mortgages.

3) That riskiest investment pays out a lucrative stream of interest payments. But Freddie's slice also has all the so-called "pre-payment risk" associated with that $1 billion worth of loans. So if lots of people "pre-pay" their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can't refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.

I don't understand how you can not find an issue with Freddie Mac's operations, especially in light of these additional activities.

JG

Tue, Jan 31, 2012 - 3:25pm
(Reply to #4) #5
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I'm just pointing out the irony...

Now FM is making money betting with public funds based on the premise that borrowerswill not be able to refi due to their stricter guidelines. Yet these public funds were given to them with the publicly stated goal in mind that they would assist borrowers in refinancing to better terms and rates. Therefore, conflict of interest! FM is stil loosing money like crazy, their real balance sheets are getting worse and worse and they have hardly been of assistance to most residential borrowers. 

Don't worry, further economic deterioration, persistent unemployment, pending war, rising inflation and further market volatility will continue to lower home prices and thus sink bank assets and evaporate everyone else's equity. FM should have been toast a long time ago and most the the big banks are zombies simply being propped up by bailouts, criminal accounting tactics and gov't stealth measures in their favor.

This is more of the same and a total farce!

JG

Tue, Jan 31, 2012 - 3:50pm
(Reply to #5) #6
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Yes, Ironic

JuanGalt

Yes, I agree. It is ironic.

Poet

JuanGalt wrote:

Now FM is making money betting with public funds based on the premise that borrowerswill not be able to refi due to their stricter guidelines. Yet these public funds were given to them with the publicly stated goal in mind that they would assist borrowers in refinancing to better terms and rates. Therefore, conflict of interest! FM is stil loosing money like crazy, their real balance sheets are getting worse and worse and they have hardly been of assistance to most residential borrowers. 

Don't worry, further economic deterioration, persistent unemployment, pending war, rising inflation and further market volatility will continue to lower home prices and thus sink bank assets and evaporate everyone else's equity. FM should have been toast a long time ago and most the the big banks are zombies simply being propped up by bailouts, criminal accounting tactics and gov't stealth measures in their favor.

This is more of the same and a total farce!

JG

Tue, Jan 31, 2012 - 4:22pm
#7
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It is not clear to me....

The article doesn't exactly explain what investment vehicle FM is using to betting against the homeowners nor how they will profit from the peoples failure to refinance.  My gut tells me this story is a bit sensationalistic and it is not so clear that what FM is doing is unethical.  At least FM has a risk that they are actively trying to hedge and many people, including myself, would be highly critical of them if they continued to loose taxpayer money. 

If anything it shows the insanity of Government Sponsored Enterprises (GSE)?   Are they supposed to exist for the good of society or their shareholders?  If their financial interests diverge from society should they sacrifice their own shareholders?  If so, why would anyone want to be a shareholder?  Clearly the reason everyone felt comfortable investing in GSEs was that everyone knew that they were a classic case of privatized profits, and socialized loses.

This does not seem like totally unethical behavior of the kind that GS did, ie. selling bad products to their customers while actively betting that those same products would blow up.

Tue, Jan 31, 2012 - 7:55pm
#8
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When did they get ugly

 These arguments over these entities gets my goat because they were the classic good idea which morphed into something ugly.  Public entities can do good.  Public private partnerships,  which this was not when it started is the perfect set up, not to remove beauracratic waste,  but to remove any and all safeguards,  byt creating private profit and public risk.

None of this cluster f*** would have happened to the degree that it did if people hand't been able to bundle and sell the risk.  HW Bush started the so called give more mortgages to poor people thing,  but even that was not the cause of this mess.  It was when theyr ealized they needed more and more mortgages to bundle and that no one cared if they were any good that we got into trouble.

 

 

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