Fannie Mae, Freddie Mac Shown as Mortgage Market Predators

rcwhalen's picture

Got an interesting note from Chris on the Berlin-DC-LA mortgage thread this AM.  Confirms my view that the housing GSEs are feeding off lower income borrowers.  -- Chris

Thought you might be interested in the latest news that Freddie Mac bet against Refis.  Seems like more scandals at the GSEs; just what we didn't need.

This morning, NPR and ProPublica, began reporting on financial transactions at Freddie Mac that bet against homeowner refinancing with their portfolio.  I think that there are a number of important policy implications of this story, not the least of which is pushing hard to separate the GSEs from their portfolios and move toward reducing their oversized influence in housing finance.

These transactions are not only against the public interest, but are in violation of their mandate to reduce risk.  Even worse, these transactions create derivative securities that are hard to sell or unwind, so that they make it more difficult to privatize the GSEs. FHFA approved differences in lending standards for the two institutions, which also moves against common standards and privatization.

Here is a link at ProPublica ( and


Professor Tony Sanders at GMU put it well: "Face it, Fannie Mae and Freddie Mac are like dinosaurs from Jurassic Park.  They will fight to survive. And you can't control them!"

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El Hosel's picture

Give it a few years,  we may even see a commitee appointed to investigate this matter.... Maybe those MF Global investigators, if the don't get Vaporized.

Widowmaker's picture

You and i both know without a doubt that the setup is to fuck the taxpayer twice.

Classic setup in advance, risk insulated in uncle sams treasury/fed incest-fest, payout x2

Obama and Congress behaving like bitches in heat, sucking bank dick at every opportunity for change - and nobody knows a fucking thing.

Justice inc. Government for profit.

lotsoffun's picture

guys - stop.  come on.  it's called 'hedging'.  you have to protect your interest against losses.  we saw it with goldman sachs - and what happened?  nothing.  ok - so i sold you a 'shitty deal'.  and then i bet against it.  but - we all know - you took one side of the bet - i was nice enough to package it up and sell it too you.  turned out you were wrong, that's the cookie.  eat it.  sometimes i bet wrong too.  i eat it.  see you tomorrow - i will have a new deck to deal from.  we are all just pals.  if you don't want to play - there is no game.  see?



Bruce Krasting's picture

The FHFA response to the NPR story below. Net-net they say it's no big deal (5b out of 650b). They also say they are not going to do it any more.

What's interesting to me, is that FHFA is responding to this as fast as they did.

rawsienna's picture

It was a financing vehicle not meant to reduce risk (as admitted in the FHFA response) but in reality to give the impression they are reducing balance sheet WITHOUT reducing risk.  Five billion market value of a leveraged inverse floater can have the same risk as 25bb in MBS (prepay/convexity risk). The real question is why not just sell the 20bb or so in MBS and be done with it.  Why keep the prepay risk?  Fact is Scott Simon was correct, they retained a lot of prepay risk when it could have just been sold.  Also, why was the agency involved in MBS derivative trades while in conservatorship?

ghostfaceinvestah's picture

All good questions.  I never understood why the GSEs were allowed to hold such big portfolios in the first place.  They have nothing to do with their guarantee business.  If the demand for agency MBS wasn't sufficient, the market would have adjusted by lowering MBS prices/raising yields.  The market would have regulated the footprint of the GSEs.

Yet another failed experiment in central planning.

Augustus's picture

Rather than explain that it is sensible and responsible to employ these hedges, they can make themsilves look worse (and more stupid to the knowledgeable) by taking the political way out.  Pretty poor response and it will simply cost more bailout money.

ian807's picture

What's really shocking is that NPR is flirting with actual news.

divide_by_zero's picture

No doubt, typically just another wing of the Soros media network bent on misinformation.

Heroic Couplet's picture

Hm, I thought it was the recently created financial derivatives that caused all the problems: the CDOS, squaired, cubed, quadrupled along with imaginary wealth in real estate and mortgage backed assets.

F&F have worked correctly for 40 years or more. How come all of a sudden they're broken? who's the source?

Widowmaker's picture

"No one saw it coming"

"Mission accomplished."

How's those bonuses taste, you pinstripe-fraud fucks?

W10321303's picture

If you go to Yahoo Home page you will see a story from Reuters (sic) being featured. It showcases the dire consequences of abandoning your mortgage. Is this a mere coincindence of The Market? On the day that the further crimes of the corporatist sociopaths is exposed?   Speaking of Stalinist plots, the second biggest cultural event in the world is coming up this Sunday.Obviously part of the sociali(ist)zation process. After all, the whole point of the contest is to WIN, right? I mean you can't even stomp on your opponents head when he is on the carpet, so to speak. The NFL and all of its Central Planning. We need to get some "Invisible Guiding Hand of the Free Market' Zombies in there right away!

Tijuana Donkey Show's picture

I hate the NFL, it's the Circus Maximus of the modern age. Let's bet on the red, greens, blues, and whites, while the Senate and Caesar raid the treasury. All we need is a jewish style revolt/incident against the will of the empire, and the parallel is complete. At least we have chips and dip.....

11.11's picture

These folks who act as if they are "stuck" are ridiculous.  You're not stuck!  All you have to do is pay back the money you voluntarily borrowed. 

Why wouldn't Fannie/Freddie make this bet?  They give you a 6.5% rate and then they bet that you won't be able to sell the house or refi into a better rate.  I'd make that bet, especially if I decide whether or not you can refi.

If you think Fannie/Freddie's guidelines are too tight, find someone else who will loan you a few hundred thousand at a fixed rate of 4% for 30 years on collateral that continues to lose value.

How about the argument that Fannie/Freddie would be better off allowing underwater borrowers with poor credit to refi into a lower rate rather than risk default?  The couple mentioned in the article continue to pay their 6.5% mortgage every month.  Why would F/F voluntarily lower their rate?  


Augustus's picture

They are simply hedging the lending price.  If the borrower either does a re-fi or a foreclosure, Fannie no longer earns the interest on that loan and must reinvest.  since the loan in the portfolio was financed with Fannie borrowings, they need something to possibly cover the rate change on the required reinvestment.  It is not betting against any borrower, it simply hedges against early payoff for any reason.

This another example of why NPR "reporting" is generally worthless.  Any false analysis that yields the result that a financial firm was evil is good to broadcast.

anonnn's picture

IIRC, Fannie and Freddie both gave explicit directions to their lender clients to omit certain data entry "blanks" on their standard applicatioin forms.

I have not seen any interest in pursuing this aspect of MERS-fraud.

The docs were on the web at one time.

LasVegasDave's picture

Oh I get it:

Congress forces the GSEs to float/buy/backstop loans to noncredit worthy people, then grandstands when the GSEs hedge the risks of default.

what a fucked up country we live in.

chunga's picture

Yeah. You get it.

That same congress is "considering" a ban on insider trading.

Not gonna happen. Nobody is gonna "force" congress to do any damn thing. Do you honestly believe the "Community Reinvestment Act" was anything but a ruse?

When AIG dropped their big shit the cronies at Fannie/Freddie were in place and ready to dump it on the taxpayers.

...while managing to keep straight faces for the cameras.

Normalcy Bias's picture

The only surprise in this story is that NPR actually reported it.

lesterbegood's picture

Prepping the public for the takedown of FedCorp...stay tuned for more..

SAT 800's picture

I'm sure it was Bush's fault.

Benjamin Glutton's picture

speechless bitchez!!!

GCT's picture

Spot on Dark Space my thoughts indeed.  DeMarco does not want to play by the banksters and politico rules.  Those bonds are indeed different and the reporter does not need to be credible as it will be on all MSM for the sheeple to digest tonight!  They know nothing so the reporter can indeed not do his homework and just spout the party line!

LouisDega's picture

Ok, So Dont buy a house. 

Dark Space's picture

Unfortunately the article has so many incorrect statements that it lacks credibility. I don't disagree that the government and its pawns, Fannie and Freddie, aren't cannibalizing the all the borrowers, but the article stinks. The guy they make out to be the bad guy at Freddie just because he got paid a lot without any further qualification as to why he is a bad guy at Freddie - hasn't worked at Freddie in nearly a year. The bonds they are describing are not Inverse Floaters, but Inverse IOs, and they probably meant to include regular IOs in the description as well. You may say, that's close enough, but I assure you an Inverse Floater and an Inverse IO are very different - one gets principal back if it doesn't default, and the other never gets principal back. This reporter didn't do his homework. I smell a false flag scandal to dethrone DeMarco to further someone's political agenda.

MrBoompi's picture

Did these reporters do their homework?

"Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates."

Why the fuck wouldn't they do something about the people trapped in these mortgages as oppose to betting against them?  Who are these "agencies" supposed to be helping?  And who really gives a shit if you call these bets Inverse Floaters or Inverse IOs?  A spade is still a fucking spade.

rawsienna's picture

wrong big fella  - The bonds had a sliver of principa to make em look like a bond, not an invio.  Afrter all, an inverse floater is nothing more than a po and an invio. They created bonds with 79% coupons and 25x leverage so they had huge io risk. Reporter DID A GREAT JOB.  These transaxction were meant to deceive.  Based on your response, it worked. Yes, they are "bonds" but with dollar prices in the 200s - I would call that an IO

Dark Space's picture

I understand what an Inverse Floater is. Unless you are reading a different version of the article than me, though, the description within the article is for an Inverse IO - not an Inverse Floater. I honestly don't know what the actual bonds in question are, but the reporter's description is inconsistent with the label he is using.


Dollar prices in the 200s? That doesn't make sense - 2x Par? 79% coupons and 25x leverage? You've got to post a few cusips so we can look at these bonds you describe.

rawsienna's picture

dont have deals in front of me but if you look up any FHR CMO deal from early 2011 off higher coupons you will see plain as day in the prospectus that Freddie supplied the collateral and took down what is essentially all the invio and a smidge of PO (then used a MACR option to have a bond with principal but was io weighted)..Example would be taking 100mm POS of 6s and combining it with a billion ios off 6s.  You would have a coupon bond of 60%..Hope that helps

Lord Koos's picture

I thought an inverse floater was a turd that sinks.

SAT 800's picture

See the Article here by Bruce yesterday; DeMarco is in the way of Obummer;s latest scam.

Raging Debate's picture

I didn't see Bruce's article but I did read your short net out. Any guess as to the costs to confidence of political assasinations? Is Nazi Germany prior to the Night of the Long Knives a model to consider?

Snakeeyes's picture

Perhaps Chris and Chris (Chris^2) are correct. But it highlights the problem with Fannie Mae and Freddie Mac's dual mandate that FHFA Director DeMarco hss to sruggle with.

NPR: Freddie Mac Betting Against Struggling Homeowners (DeMarco’s Dual Mandate Problem)