Freddie Mac. Betting against home owners.

Is Freddie Mac trying to help homeowners-or hurt them?
A recent investigation into trades made by the taxpayer-owned mortgage giant shows that while Freddie with one hand is helping consumers get mortgages, it is, with its other, making those mortgages harder to refinance. Result: Homeowners trying to refinance their way out of high-interest mortgages say they feel trapped in "financial jail."

The investigation-a joint effort between National Public Radio and ProPublica, an independent, non-profit investigative news service-looked at multibillion-dollar investments made late in 2010 by Freddie. These investments pay off only if homeowners remain locked in high-interest mortgages.

Not only do the investments appear to be at odds with Freddie's public mandate, they increase the size of Freddie's investment portfolio at a time when the Freddie, under the terms of a 2008 bailout agreement, is supposed to be reducing it. Both Freddie Mac and Fannie Mae were bailed out by U.S. taxpayers in 2008 and are now owned by the public.


I guess my post title should actually read, "Taxpayers screwing homeowners".

Please, someone explain this to me. I'm told that I just simply do not understand how finance works. The Fed is doing everything they can to crush the dollar (so said in the interest of keeping interest rates low) so the housing market and others can improve but here is Freddie Mac betting against that very thing and working against it.

I guess I really don't understand.

Is Freddie Mac Betting Against Homeowners? - Yahoo! News

No, you DO understand. All of this WHILE under full control and scrutiny of uncle sam, too.


I find that drinking a lot helps.

I'm not sure I understand that either. How can they keep homeowners from refinancing at a lower rate? They can refuse to refinance themselves, of course, but there are tons of lenders out there. Why not go to the credit union or a private bank and do a refinance?

They can do it the same way Sally Mae refuses to allow their loans to be consolodated.


Which is to say, they simply won't sell their loans out to other companies that buy up those loans to make the interest. If Freddie Mac refuses to refi the loan themselves, and they OWN the loan, they can also refuse to sell it to someone else.

KevinKohler said:

They can do it the same way Sally Mae refuses to allow their loans to be consolodated.


Which is to say, they simply won't sell their loans out to other companies that buy up those loans to make the interest. If Freddie Mac refuses to refi the loan themselves, and they OWN the loan, they can also refuse to sell it to someone else.

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but the homeowner can get a new loan from someone else and pay the original loan off, can't they? Have they built in some sort of outrageous pre payment penalty or something ?

People refinance their mortgages all the time without getting permission from the original lender.

Dittohead not! said:

I'm not sure I understand that either. How can they keep homeowners from refinancing at a lower rate? They can refuse to refinance themselves, of course, but there are tons of lenders out there. Why not go to the credit union or a private bank and do a refinance?

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Maybe I'm wrong, but I'm assuming these may be people who want to refinance due to financial difficulty after the housing market crash. If this is the case, alot of folks would have trouble finding a credit union or bank TO refinance their loans. Alot of people have basically been unable to maintain any good credit standing over the past three years.

Dittohead not! said:

but the homeowner can get a new loan from someone else and pay the original loan off, can't they? Have they built in some sort of outrageous pre payment penalty or something ?

People refinance their mortgages all the time without getting permission from the original lender.

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You know what, I don't know, actually. I would wager it comes down to credit, as someone else said. I mean, I bought MY house JUST two years ago, and it was HARD to qualify, and I was using an FHA loan. My score had to be 750, or higher, across all three. For a 150K house, not some million dollar dream home. I wonder if the credit crunch is stil that bad? I have to imagine it is...and someone struggling to pay their mortgage is likely NOT gonna have a credit score that is going to entice that sort of risk, especially now that banks have MUCH tighter credit restrictions applied to them by LAW.

KevinKohler said:

I wonder if the credit crunch is stil that bad? I have to imagine it is...and someone struggling to pay their mortgage is likely NOT gonna have a credit score that is going to entice that sort of risk, especially now that banks have MUCH tighter credit restrictions applied to them by LAW.

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I strongly suspect it is still that bad. When you screw up your credit, it takes at least 7 years to dissipate the bad raps off your credit report, and in the meantime, you need to be building up your credit rep again. Otherwise, you look like a fresh slate, which can be riskier than someone who has a few minor dings.

This article is incomplete, to say the least. At most, it's deliberately misleading. Read this:

In the same way that it's not in Freddie's interest to have borrowers default on those mortgages, it's not in its interest to have them switch to cheaper mortgages, since, when a borrower refinances, he pays off the first loan early, and those juicy interest payments stop.

Freddie thus has taken steps to make it harder for homeowners to refinance.

For example, in October 2010 it began refusing to insure new loans for homeowners who have had a short sale in the past two to four years. (In a short sales, a house is sold for less than the value of the underlying mortgage.)

That rule change has hit people like Jay and Bonnie Silverstein of Pennsylvania hard. Because the Silversteins did a short sale of their old home, Freddie now will not help them refinance their new one, even though the Silversteins say they haven't missed a payment. Says Jay Silverstein, who speaks for millions of consumers in his same situation, "We're in financial jail. We've never been there before."

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Freddie has underwriting guidelines. I think we all know what that means....minimum standards for when Freddie with accept a loan into its portfolio. Underwriting standards include things like debt ratio of the borrower, down payment requirements, minimum credit scores, et al. Makes sense, right? In fact, if they'd held to reasonable underwriting standards prior to the housing market collapse, it may not have even happened.

Freddie making it harder to refinance makes absolutely perfect sense. Look at the example they give us: the Silversteins. Most short sales are the result of refinancing into a lower rate (usually) while, at the same time, pulling money out of the equity of one's home. Like using the equity to pay off credit cards, etc., etc. If it wasn't for that reason, which is a poor excuse, then it's because they decided to sell their home and let the bank take a loss on their mortgage. Not exactly the way to endear one's self to Freddie...who probably even took the loss.

So Freddie says, "If you've had a short sale in the last two (or is it four...not really clear in the article), we aren't going to lend you any money. And remember, that short sale trashed their credit because it left their lender holding the bag.

This article, as I've laid this out here, in my opinion is deliberately misleading...or else written by someone who doesn't understand underwriting. Freddie is in the business of guaranteeing loans. It's their mission. They want to do that. But, hopefully, they've learned a valuable lesson: Don't lend money to people who can't buy lunch.

And, as for the Silversteins whining, look at it this way: Somebody buys a car through the finance company. After six months, they "turn the car in to the finance company" because they can't afford to pay for it anymore. Then they whine because they can't get another car loan.

Dittohead not! said:

but the homeowner can get a new loan from someone else and pay the original loan off, can't they? Have they built in some sort of outrageous pre payment penalty or something ?

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No, in many cases they can't. Many of these loans originated without tried and true lending principles. If you can't verify your income Home Town Banker isn't going to refinance you. Also, if you owe $175,000 and your home is now valued at $120,000, Home Town banker isn't going to refinance you.

This is truely picking the lesser of two evils. I say they should be FORCED to refinance these loans. I'm no fan of the entire situation but it's far, far, far better to keep these people in their homes than it is for Freddie to try and maintain their justification for huge bonuses.

1Perry said:

No, in many cases they can't. Many of these loans originated without tried and true lending principles. If you can't verify your income Home Town Banker isn't going to refinance you. Also, if you owe $175,000 and your home is now valued at $120,000, Home Town banker isn't going to refinance you.

This is truely picking the lesser of two evils. I say they should be FORCED to refinance these loans. I'm no fan of the entire situation but it's far, far, far better to keep these people in their homes than it is for Freddie to try and maintain their justification for huge bonuses.

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So then you are in favor of a massive homeowner bailout?

You couple the current credit crunch with this new drive to get credit score on prepaid debit cards, and it spells out a desperate debt market SCRAMBLING to get their next crop of interest rates in before harvest time is over.

MaggieD said:

So then you are in favor of a massive homeowner bailout?

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Are home owners every bit as important to our economy as large businesses?

MaggieD said:

This article is incomplete, to say the least. At most, it's deliberately misleading. Read this:

Freddie has underwriting guidelines. I think we all know what that means....minimum standards for when Freddie with accept a loan into its portfolio. Underwriting standards include things like debt ratio of the borrower, down payment requirements, minimum credit scores, et al. Makes sense, right? In fact, if they'd held to reasonable underwriting standards prior to the housing market collapse, it may not have even happened.

Freddie making it harder to refinance makes absolutely perfect sense. Look at the example they give us: the Silversteins. Most short sales are the result of refinancing into a lower rate (usually) while, at the same time, pulling money out of the equity of one's home. Like using the equity to pay off credit cards, etc., etc. If it wasn't for that reason, which is a poor excuse, then it's because they decided to sell their home and let the bank take a loss on their mortgage. Not exactly the way to endear one's self to Freddie...who probably even took the loss.

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I'm not a banker or real estate expert but that isn't what my understanding of a short sale is. (the first example, not the second)

So Freddie says, "If you've had a short sale in the last two (or is it four...not really clear in the article), we aren't going to lend you any money. And remember, that short sale trashed their credit because it left their lender holding the bag.

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In a short sale you sell your house. (for a loss). You no longer have a reason to refinance.

This article, as I've laid this out here, in my opinion is deliberately misleading...or else written by someone who doesn't understand underwriting. Freddie is in the business of guaranteeing loans. It's their mission. They want to do that. But, hopefully, they've learned a valuable lesson: Don't lend money to people who can't buy lunch.

And, as for the Silversteins whining, look at it this way: Somebody buys a car through the finance company. After six months, they "turn the car in to the finance company" because they can't afford to pay for it anymore. Then they whine because they can't get another car loan.

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The article is about refinancing, not getting another loan on another house.

1Perry said:

This is truely picking the lesser of two evils. I say they should be FORCED to refinance these loans. I'm no fan of the entire situation but it's far, far, far better to keep these people in their homes than it is for Freddie to try and maintain their justification for huge bonuses.

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No, not at all. It's not a good idea to let people keep homes that they cannot afford. That is a huge part of what got us into this mess in the first place.

KevinKohler said:

Are home owners every bit as important to our economy as large businesses?

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Don't misunderstand. I'm in favor of the upside-down homeowner catching a break. It should have been done immediately. Right now, the housing market is suffering the Chinese water torture of all these short sales and foreclosures trickling steadily into the marketplace holding down housing values. In many areas of the country, rather than stabilizing, housing prices are still in a slide.

I actually agree with Perry. And the fact is, it wouldn't cost the banks even half as much as it's costing them now.

But, make no mistake, if banks actually did begin forgiving principle enmasse, the public would be outraged.

MaggieD said:

So then you are in favor of a massive homeowner bailout?

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First you will have to explain how this is bailing anyone out. The current 30 year rate is say around 4%. Homeowner A bought at 8%. They now, to stay in their home want to refinance at 4%, the going rate.

I understand that many would not qualify today, but it doesn't cost the taxpayer here. It will when they can not refinance and have to walk away.

So, as I see it, we are not bailing out a homeowner but refusing to allow them to refinance at current rates, we are bailing out Freddie by allowing them to say no.

lizzie said:

No, not at all. It's not a good idea to let people keep homes that they cannot afford. That is a huge part of what got us into this mess in the first place.

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If they could not afford them at all, they would have already walked away. They are having trouble affording them. They simply want to refinance at the current rate to stay in their house.

1Perry said:

If they could not afford them at all, they would have already walked away. They are having trouble affording them. They simply want to refinance at the current rate to stay in their house.

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They shouldn't have financed in the first place if they couldn't afford to buy a house. If you can't afford the terms of a contract, never sign it.

MaggieD said:

Don't misunderstand. I'm in favor of the upside-down homeowner catching a break. It should have been done immediately. Right now, the housing market is suffering the Chinese water torture of all these short sales and foreclosures trickling steadily into the marketplace holding down housing values. In many areas of the country, rather than stabilizing, housing prices are still in a slide.

I actually agree with Perry. And the fact is, it wouldn't cost the banks even half as much as it's costing them now.

But, make no mistake, if banks actually did begin forgiving principle enmasse, the public would be outraged.

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Perhaps we crossed lines somewhere. I'm not advocating forgiving principle either. There are cases where short sales go through but that is another topic IMO.

lizzie said:

They shouldn't have financed in the first place if they couldn't afford to buy a house. If you can't afford the terms of a contract, never sign it.

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That bridge done burn't down.

1Perry said:

I'm not a banker or real estate expert but that isn't what my understanding of a short sale is. (the first example, not the second)In a short sale you sell your house. (for a loss). You no longer have a reason to refinance.

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In the eyes of the lender, a refinance is no different than a new purchase. A short sale requires the cooperation of the bank wherein they realize they're not going to get all the money you owe, but they figure it's better to negotiate a loss than take it in foreclosure. The Silversteins were probably only able to buy another home because they were able to pay a really high interest rate. They surely wouldn't have qualified for standard rates...and should be delighted to have even gotten a mortgage. More than likely, that high interest rate loan was through a mortgage broker who had an investor who was willing to take the risk. Standard mortgage with lower rates? No surprise they can't get one.

1Perry said:

That bridge done burn't down.

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Doesn't matter. I'm not willing to try and build it again. If people signed contracts to buy homes, then couldn't afford the terms, it was their shortsightedness that caused the problem. Now that they've screwed up their credit even more, there is absolutely no incentive for lenders to refinance, nor should they be forced into doing so. THe American taxpayer is already on the hook for far too much money in the way of bailouts.

1Perry said:

First you will have to explain how this is bailing anyone out. The current 30 year rate is say around 4%. Homeowner A bought at 8%. They now, to stay in their home want to refinance at 4%, the going rate.

I understand that many would not qualify today, but it doesn't cost the taxpayer here. It will when they can not refinance and have to walk away.

So, as I see it, we are not bailing out a homeowner but refusing to allow them to refinance at current rates, we are bailing out Freddie by allowing them to say no.

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So you want Freddie to relax its underwriting standards back to the ridiculously low standards that got us into this mess to begin with? You know that sound of flushing you hear? That's taxpayer money going down the drain when mortgagees default. P.S. When we bail out Freddie, we're bailing out taxpayers.

lizzie said:

Doesn't matter. I'm not willing to try and build it again. If people signed contracts to buy homes, then couldn't afford the terms, it was their shortsightedness that caused the problem. Now that they've screwed up their credit even more, there is absolutely no incentive for lenders to refinance, nor should they be forced into doing so. THe American taxpayer is already on the hook for far too much money in the way of bailouts.

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Nothing in the article notes that their credit is any different than the day they bough their house. I could have a credit score of 810 and I owe $180,000 on a house that is now worth $120,000 because of the current market, I can't get a loan on it.