Feds throwing homeowners under the bus

Thursday morning, NPR’s On Point broadcast a shocking story of government betrayal of homeowners. The politics of this will be fascinating, if the mainstream media are willing to touch this hot-potato. Why? Because Edward DeMarco — orchestrator of the latest expansion of these predatory entities — was an early appointment of Barack Obama. When President Obama later attempted to remove him, his effort was blocked by the GOP. Barack Obama should certainly be asked to explain this appointment. The GOP should be asked about the morality of preserving a political embarrassment for a presidency they’ve vowed to destroy against the interests of millions of Americans. It appears that the GOP again prefers to destroy the lives of millions of Americans rather than allow Barack Obama to correct the problem (whatever its source).

This morning, NPR’s Morning Edition broadcast a follow-up offering Edward DeMarco a chance to respond. His response?

Nothing immoral went on, Edward DeMarco says. The agency’s multibillion-dollar bets against homeowners being able to refinance were “ordinary business transactions.”

Saying he is “completely puzzled by the notion that there was something immoral that went on here,” the man at the top of the agency that regulates Freddie Mac has explained why he believes the taxpayer-owned mortgage company did nothing wrong when one of its arms, as NPR and ProPublica have reported, “placed multibillion-dollar bets against American homeowners being able to refinance to cheaper mortgages.”

A joint report from NPR and ProPublica earlier this week reveals outrageous and shocking (even to jaded cynics like me) behavior of Freddie Mac: the agency is simultaneously making it far more difficult for struggling homeowners to refinance high-interest mortgages, while profiting handsomely from hedge funds based on those mortgages.

From the NPR piece:

Simply put, “Freddie Mac prevented households from being able to take advantage of today’s mortgage rates — and then bet on it,” says Alan Boyce, a former bond trader who has been involved in efforts to push for more refinancing of home loans.
[snipped]
Plus, in 2010 and 2011, Freddie didn’t just hold a simple pile of loans. Instead, for hundreds of thousands of home loans, it used Wall Street alchemy to chop these loans up into complicated securities — slices of which were sold in financial markets.

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.

If the homeowner is unable to refinance, the Freddie Mac portfolio managers win, Simon says. “And if the homeowner can refinance, they lose.”

Oh, and by the way, the individual Freddie Mac managers who put this obscenity together received multimillion-dollar bonuses.

This should be a big story. It exemplifies the structural bias against the 99% that OccupyEverything has been highlighting.

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4 Comments . Leave a comment below.
  1. Excellent post, Tom.

    Can’t quibble with you about the facts here. These bankers have their own motives; a memeber of my family made what I considered to be a fair offer for a house that the owners had walked away from. It turns out that the bank really doesn’t want to sell the house. I wonder why?

  2. How can the GOP block removing an appointee?

    Even those subject to advice and consent can be fired without congressional approval. History buffs will remember the Tenure of Office Act, which Congress passed to prevent President Andrew Johnson from removing officials friendly to their more radical ideas about Reconstruction. They essentially dared Johnson to violate it, and when he did that was the basis for his impeachment. I’m pretty sure the SCOTUS eventually ruled this law to be unconstitutional.

    • The position requires confirmation

      Here’s what the Washington Post wrote about the situation last August (emphasis mine):

      The Obama administration had hoped to be rid of DeMarco by now. In November 2010, it nominated North Carolina Banking Commissioner Joseph Smith Jr. to fill the position. But in Smith’s confirmation hearings, Sen. Richard C. Shelby (R-Ala.), the top Republican on the Senate banking committee, asked Smith whether he would resist pressure from the administration to write down mortgages at the expense of taxpayers. Unsatisfied with the answer, Shelby torpedoed Smith’s appointment, leaving DeMarco, the acting director, in charge.

      Which isn’t to say that DeMarco tilts toward Republicans, either. “No one can accuse DeMarco of trying to stick it to the Obama administration,” says Rep. Barney Frank (Mass.), the leading Democrat on the House Financial Services Committee. “He has been equally resistant to Republicans who want restrictions on compensation or sell off the portfolio too quickly. He wants to maximize Fannie Mae and Freddie Mac’s returns, and he’s been very consistent in resisting anything that will jeopardize that.”

      According to one housing expert with knowledge of the discussions, a few months ago, Geithner began looking for ways to fire DeMarco. But the plan would have required moving a credible replacement into the FHFA for at least 90 days beforehand. Geithner gave up the effort after being rebuffed by multiple candidates.

      Nor, experts say, is it clear that the White House actually can fire DeMarco. By law, the White House has to have cause to remove the head of the FHFA, which is supposed to be an independent regulator. Simply disagreeing with the agency’s policy direction isn’t enough. Which means that DeMarco is likely to remain the most powerful man in housing for some time to come.

  3. Martha Coakley and the Globe limp to the scene

    In a report buried in the Saturday business section of today’s Globe on SuperBowl weekend, Martha Coakley and the Globe belatedly acknowledge the outrage (emphasis mine):

    Massachusetts Attorney General Martha Coakley is urging mortgage giants Freddie Mac and Fannie Mae to do more to prevent “unnecessary foreclosures,’’ including by reducing loan principal for homeowners struggling to pay their mortgages.

    Coakley yesterday released a letter she sent to Edward DeMarco – acting director of the Federal Housing Finance Agency that oversees the two semipublic lenders – asking him to promote principal forgiveness as a way to mend the housing market and the nation’s overall economy.
    [snipped]
    Coakley’s letter comes as concern grows over the role of major US lenders – including Fannie Mae and Freddie Mac – in creating unfair loans and then unnecessarily foreclosing on homeowners who could have managed if granted lower rates.

    Earlier this week, a report by National Public Radio and ProPublica, an independent nonprofit newsroom, said that Freddie Mac invested billions of dollars betting that homeowners wouldn’t be able to refinance their homes at historically low mortgage rates. Some have called that position a conflict of interest, a charge DeMarco has said is not true. Freddie Mac stopped carrying out the trades last year.

    “Some have called that position a conflict of interest”? No kidding. There is no reason to explain the Thanksgiving-weekend tightening of refinancing regulations by Freddie Mac (under the direction of Mr. DeMarco) other than to increase short-term profits in the obscene hedge-fund by screwing American homeowners.

    It is disingenuous for the Globe to position this as just another spat between “housing advocates” and the government. This is a major bodyblow to the 99%, perpetrated by an agency funded by taxpayers that is supposed to be protecting our interests.

    Ms. Coakley is doing the right thing by demanding that the feds encourage refinancing at lower rates. This is a crucial issue that affects an enormous number of Americans — including far too many Massachusetts residents — and it deserves front-page coverage on days when more than three people read the paper.

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Tue 29 Jul 4:53 PM