Have you ever wondered why, despite numerous government programs made to help struggling homeowners, there are still so many obstacles that prevent borrowers from refinancing their loans?
Here is one of many disturbing reasons: Freddie Mac, which owns or guarantees many U.S. mortgages, makes a ton of money by betting on homeowners who are stuck with high mortgage rates because they are unable to refinance.
A report by ProPublica and National Public Radio exposed Freddie's troubling investment practice. The taxpayer-funded mortgage giant has bet billions in a type of investment that pays off when homeowners stay locked into high interest rates, according to the report.
The complex investment is known as inverse floaters, which is a type of investment backed by the interest payment on a mortgage loan. The higher the interest rate locked on the mortgage and the lower the current rates are, the more money Freddie makes on the investment.
Let me walk you through the dirty, but perfectly legal, game:
When you take out a mortgage, your loan is piled up with thousands of other mortgage loans and placed into a portfolio that is sold to Fannie or Freddie. That portfolio gets divided into two types of investment: One type goes to investors who like to be safe, and the other goes gamblers who enjoy taking risks. The safe part of the investment is backed by the principal on the loans. The risky part (the inverse floaters) is backed by the interest rate on the mortgages. Freddie likes to place its bets on the high-risk side of this game. As with most risky investments, inverse floaters are profitable, as long as homeowners are stuck with the high-interest loans.When homeowners refinance their loans with a lower mortgage rate, their original mortgage gets repaid, and Freddie loses the bet.
I'm not surprised to hear Freddie is gambling with taxpayers' money. But it is a little shocking to think Freddie is using that money to bet against tax-paying homeowners.
The irony doesn't end there. If these homeowners can no longer afford the high rates they are being forced to pay because they weren’t given a change to refinance, guess who pays for that? You do. That's because Freddie guarantees those loans and pays investors while borrowers are delinquent. And even though Fannie and Freddie like to act like private companies, your tax dollars have kept them afloat since 2008.
Told you this was dirty game!
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