Treasury To Probe Freddie Mac's Investments

Freddie Mac last month said it would stop making risky bets against homeowners after concerns were raised by its regulator, the Federal Housing Finance Agency. The statement by the FHFA was issued in response to an investigation by NPR and ProPublica that disclosed how Freddie Mac bought billions of dollars in securities that turned a profit if homeowners remained stuck in high rate mortgages. The White House said the Treasury Department is looking into Freddie Mac's investments. Steve Inskeep talks with NPR's Chris Arnold and Jesse Eisinger of ProPublica about their report.

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STEVE INSKEEP, HOST:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

And I'm Steve Inskeep. Good morning.

A story on this program yesterday got a lot of people talking across the country. NPR and ProPublica reported on the giant financial firm Freddie Mac. The government-owned firm is a huge player in the mortgage market. And as we heard yesterday, Freddie Mac invested billions of dollars in securities, betting against homeowners' ability to refinance their mortgages.

Some of Freddie Mac's investments do better when American homeowners cannot refinance at lower rates and it happens that Freddie Mac is making it tougher for them to refinance. NPR's Chris Arnold and ProPublica's Jesse Eisinger are with us now to answer some more questions about their story.

Gentlemen, good morning.

CHRIS ARNOLD, BYLINE: Morning, Steve.

JESSE EISINGER: Good morning.

INSKEEP: And let's just talk about some basics here first. How big exactly were these investments by Freddie Mac?

EISINGER: Well, Steve, Freddie did dozens of deals. And Chris and I reported that they were worth $3.4 billion. And those are tied to many more billions of dollars in mortgages. Actually, the regulator, the FHFA, came out yesterday and said it's more. It's $5 billion.

INSKEEP: Five billion dollars was put on the line by Freddie Mac in these bets against homeowners. But there is the question, I mean, Freddie Mac's trying to make money here. Were these profitable investments, as far as you know?

EISINGER: We just don't know actually. They could've been hedged off in some way, protected in some way. We just don't know. And Freddie's not disclosing that kind of information.

INSKEEP: And we should mention that Freddie Mac has been invited to talk on the record about these investments. They've so far declined, although they have given some information to you.

Now, gentlemen, one of the reasons that people seem concerned about this is because of what appears to be a conflict of interest. Freddie Mac is setting rules that have made it harder for people to refinance. At the same time, they're making these investments that do better if people fail to refinance. But as people have heard your story they've asked isn't there some firewall, some wall in this giant company between the people who are setting the mortgage rules and the people doing the investments?

ARNOLD: Yes, there is a firewall. And we've talked with this in the print version of the story, too. And Freddie itself says absolutely there is this firewall. It is impenetrable. And there's nothing that we've turned up in our reporting where we can specifically prove that there's anything nefarious going on across that firewall.

INSKEEP: You said nothing you can specifically prove. Is there any evidence, Jesse Eisinger, that raises questions for you?

EISINGER: Well, some of the timing is unusual and coincident. They tightened some of the rules at the end of 2010. And at the same time that's when the bets started ramping up. But there's no evidence that these were coordinated.

INSKEEP: OK. Let me ask another question that came in. People have asked is this just what's known as a hedge - hedging your bets, making sure that no matter which way the market goes that Freddie Mac does OK?

ARNOLD: Well, that's something that we thought about. And that was brought up to us as we were reporting this. But, you know, we went to some very senior, unassailable experts in the bond world. They said these particular kind of bets - these they're called inverse floaters - that Freddie was using, you wouldn't use those to hedge. That the way this was set up it was not a hedge. It was a bet against homeowners being able to refinance. It's the only way to look at it.

INSKEEP: OK. Couple of other quick questions here. Freddie Mac in its statement responding to your story said, hey, we have helped hundreds of thousands of homeowners refinance at lower rates. How many people actually are out there who need to refinance or could be helped by refinancing right now?

EISINGER: Well, economists' estimates varied anywhere from 10 to 20 million Americans who could benefit because they have mortgages that are too high.

ARNOLD: Yeah, and we should say that Freddie Mac wouldn't be responsible for being involved in the refinancing of all of those people, as Fannie Mae is out there, too. But you can see hundreds of thousands versus 10 or 20 million. There's a lot more people who could be helped.

INSKEEP: And one other question, gentlemen. Since your story came out yesterday what kind of response have you received?

EISINGER: There's been a lot of congressional response. Four senators - a Republican and three Democrats - came out and responded. Barbara Boxer of California wrote to the head of the FHFA. And Senator Bob Casey from Pennsylvania wrote to President Obama. And the White House was asked about this. And they said, look, it's an independent institution.

ARNOLD: And at the same time, though, the White House aid the Treasury Department is looking into this. And a lot of these senators used the word outrage in their various letters that they were sending off. So certainly you could say they are independent, but pressure it sounds like is being brought to bear.

INSKEEP: NPR's Chris Arnold, thanks very much.

ARNOLD: Thank you.

INSKEEP: And Jesse Eisinger of ProPublica, thank you.

EISINGER: Thanks for having me.

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