NPR logo

Regulator: Freddie Investments 'Nothing Unusual'

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Regulator: Freddie Investments 'Nothing Unusual'


Regulator: Freddie Investments 'Nothing Unusual'

Regulator: Freddie Investments 'Nothing Unusual'

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

Senators on Capitol Hill have criticized Edward DeMarco for the investment practices of Freddie Mac. DeMarco heads the federal agency that controls Freddie Mac and Fannie Mae. NPR and ProPublica reported that certain trades at Freddie Mac amounted to bets against homeowners being able to refinance their mortgages. DeMarco tells Morning Edition's Steve Inskeep that the trades were not particularly risky, and would not have prevented homeowners from refinancing their loans.


It's MORNING EDITION from NPR News. I'm Renee Montagne with Steve Inskeep. We'll hear next from a federal regulator controlling a mortgage giant accused of placing financial bets against homeowners. Here's Republican Senator Johnny Isakson describing investments by Freddie Mac.

SENATOR JOHNNY ISAKSON, REPUBLICAN, GEORGIA: We have a situation that's obviously at best unsavory and at worst immoral.

MONTAGNE: NPR and ProPublica reported this week the company made billions of dollars of investments that did better if homeowners failed to refinance.


This happened while Freddie was also changing rules in ways that made it harder to refinance at the lower rates that are available today.

The people dismayed include Democratic Senator Barbara Boxer.

SENATOR BARBARA BOXER: They're actually, in my view, turning against their mission. And I truly blame the regulator here, Mr. DeMarco, because he had to approve this instrument.

INSKEEP: So last evening we visited the man Senator Boxer blames. Edward DeMarco runs the agency that controls Freddie Mac, as well as its sister organization, Fannie Mae. Both were taken over by the government during the financial crisis. DeMarco wore a gray suit with an American flag lapel pin. He sat down to talk about those complex investments, known as inverse floaters. He was polite, and visibly displeased, as he said they were, in his view, nothing unusual.

EDWARD DEMARCO: This is in the class of ordinary business transactions.

INSKEEP: Senator Barbara Boxer, as you may know, said earlier he must have been aware of this, he must have known. He approves everything that they do.

DEMARCO: Fannie Mae and Freddie Mac between them have over $5 trillion in assets. They are purchasing about $100 million worth of mortgages a month. I don't think anyone should think that I am individually approving that volume of transactions.

INSKEEP: Were you aware that they were taking place?

DEMARCO: I'm certainly aware that Freddie Mac had inverse floaters on their balance sheet, and that more generally, the important point here, that structured finance of mortgages is something that goes on and has gone on for a long time.

INSKEEP: By structured finance of mortgages, DeMarco just means that Fannie and Freddie bought mortgages, bundled them up into giant investments, sliced them into little pieces and sold them. This process keeps the mortgage market moving - it's a big reason you can get a mortgage. It is also in this process that Freddie Mac placed bets in effect that homeowners would fail to refinance.

News of those investments feeds into a broader debate over how Fannie and Freddie can help American homeowners - a debate that has continued for years.

Senator Barbara Boxer yesterday told us of a meeting she had with you. She described herself as wanting to get you to do more to help homeowners. She said, quote, "he had his back up. This is not his interest. His interest is making sure Fannie and Freddie do well financially." Is that your interest?

DEMARCO: I think I have a responsibility to make sure Fannie Mae and Freddie Mac undertake activities that don't cause further losses to the American taxpayer.

INSKEEP: Your responsibility for these two huge institutions is to make sure they stop losing money.

DEMARCO: I think that's a very simple way to put it. That's what Congress wrote in the statue, that that was our responsibility.

INSKEEP: And do you also have a fundamental responsibility to the average homeowner who's got a seven percent loan and could refinance at three if only the rules were a little easier?

DEMARCO: We have a responsibility to ensure that the housing finance system works efficiently and effectively, that Fannie Mae and Freddie Mac's role in it is to bring stability and liquidity to that market and to do so in a creditworthy manner.

INSKEEP: But it sounds like you cannot sit there and think about the average homeowner. You can't think about the world from that perspective.

DEMARCO: Oh, quite to the contrary. I believe that not only I, but my staff think about the average homeowner on a daily basis around here.

INSKEEP: DeMarco says Fannie Mae and Freddie Mac have taken steps that helped many homeowners to refinance.

As NPR and ProPublica reported, though, Freddie Mac also made it harder to refinance, for example charging fees that a Federal Reserve paper said were, quote, "difficult to justify." This, too, DeMarco considers normal.

DEMARCO: And I believe that most of your listeners as taxpayers want to make sure that the new business, the new mortgages that Fannie Mae and Freddie Mac are purchasing that are now backed and supported by the American taxpayer, that we are pricing the risk of those mortgages prudently. Part of the whole problem before that created the housing bubble was lenders not pricing risk appropriately.

INSKEEP: OK. So we have a tension here, don't we? If you make refinancing easier, you may allow many more people to refinance. But you're arguing that it has to have a certain expense and you don't want to be refinancing in ways that you would end up losing money on that. Is that the argument that's the tension here?

DEMARCO: It's an interesting balancing act.

MONTAGNE: Is it right for Freddie Mac to have been making trades, like the trades we've been discussing - the inverse floaters - at the same time that Freddie Mac is setting any number of rules and regulations that will affect how easy or difficult it is for someone to refinance a home?

DEMARCO: I believe that these are separate and separable issues.

INSKEEP: He insists that one act did not affect the other. So everything that happened here was right, was correct, was morally right, entirely aside from legality?

DEMARCO: Absolutely. I'm completely puzzled by the notion that there was something immoral that went on here.

INSKEEP: Edward DeMarco, who oversees Freddie Mac, says the giant mortgage company has now stopped adding more investments of the kind that do better when homeowners fail to refinance. He says that was part of a wider adjustment of Freddie's portfolio, though that may not stop more questions from Congress.

Copyright © 2012 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.