RENEE MONTAGNE, HOST:
This is MORNING EDITION, from NPR News. I'm Renee Montagne.
STEVE INSKEEP, HOST:
And I'm Steve Inskeep.Good morning. We've discovered something surprising in the financial transactions of Freddie Mac. That's one of two giant companies the government created decades ago, to help Americans finance their homes.
Freddie Mac was bailed out by taxpayers during the financial crisis in 2008. Today, many struggling homeowners need help. They are trying to refinance at lower rates. And an investigation by NPR and ProPublica reveals that Freddie Mac is betting that homeowners fail to refinance.
The company has put billions of dollars into investments that do better when homeowners are denied the chance to refinance. Freddie Mac has also made it harder for people to get new loans on their homes. So its investments, while legal, raise concerns about a conflict of interest.
Our coverage starts with NPR's Chris Arnold.
CHRIS ARNOLD, BYLINE: Mortgage rates are at record lows, but millions of homeowners can't qualify to get those low rates. If they could, they'd be saving thousands of dollars a year on their mortgages. And Freddie Mac is one of the gatekeepers. It decides who can qualify, and who can't. Lately, it's been saying no more often to homeowners. And it turns out that at the same time, Freddie has been placing big bets against those homeowners.
ALAN BOYCE: So to state it simply, Freddie Mac prevented households from being able to take advantage of today's mortgage rates, and then bet on it.
ARNOLD: Alan Boyce is a former bond trader who's been involved in efforts to push for more refinancing of home loans. And he's not alone in being upset after finding out about these trades.
SCOTT SIMON: We were actually shocked that they'd done this.
ARNOLD: That's Scott Simon. He's the head of mortgage securities for the giant bond investment firm PIMCO - which makes him one of the biggest mortgage bond traders in the world. He says he was very taken aback when he saw what Freddie Mac was doing.
SIMON: Because it seemed so out of line with their mission - out of line with what Congress wanted them to do, out of line with what we perceived to be in the best interest of the stakeholders of Fannie and Freddie as well as the homeowner.
ARNOLD: Freddie Mac and Fannie Mae were taken over by the government in 2008. It's taken about $169 billion in taxpayer bailout money to keep them afloat. For a long time, the firms have had a policy mission to make lending more available for homeowners. But they also have giant investment portfolios. They have hundreds of billions of dollars' worth of loans and other kinds of investments that can get hurt if too many homeowners refinance.
In Freddie's case, this apparent conflict is more extreme. Freddie isn't just holding loans in its portfolio. Instead, Freddie Mac has used Wall Street alchemy to take tens of thousands of loans, and slice and dice them up into complicated securities. So mortgages that people want to refinance are now tied up in these securities. And the slice that Freddie invested in hinges completely on whether those homeowners stay stuck in higher interest rate loans. That's their bet. Scott Simon...
SIMON: They actually put themselves squarely on the opposite side of the homeowner. So if the homeowner lost and was unable to refinance, they win; and if the homeowner could refinance, they lose.
ARNOLD: Freddie Mac is now controlled by its regulator, the Federal Housing Finance Agency. The FHFA and Freddie both declined to talk about the company's trading portfolio. Freddie, in a statement, though, said that the company, quote, is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates. And Freddie says it refinanced loans for hundreds of thousands of borrowers just last year.
Still, many homeowners feel trapped. And we actually tracked down one of these homeowners that Freddie Mac is effectively betting against. It was a couple, it turns out - Jay and Bonnie Silverstein.
JAY SILVERSTEIN: Well, we're truly stuck. I mean, obviously, financial jail is no fun.
BOYCE: The Silversteins live in an unfinished development of yellow stucco houses north of Philadelphia.
BONNIE SILVERSTEIN: Chris, let me have your jacket.
ARNOLD: OK. Thanks.
JAY SILVERSTEIN: Sure...
ARNOLD: The developer went bankrupt, leaving some of the home lots here surrounded by orange, plastic construction fencing. The Silversteins bought this home back before the market crashed, and then they couldn't sell their old house. They now know that buying before selling was a mistake, and the price that they've paid for it was painful.
JAY SILVERSTEIN: You know, it wound up taking us years to sell that house. So we had two homes and two mortgages for two and a half years.
JAY SILVERSTEIN: It just drained us. It just burned up my 401(k), and drained us.
ARNOLD: Jay was a manager at Johnson and Johnson, and he has a modest pension. The couple havn't missed any mortgage payments on this house but eventually, they did on their old one. Their current interest rate is near 7 percent, and so if they could refinance at today's rates - below 4 percent - that would save them about $500 a month.
JAY SILVERSTEIN: You know, we're living paycheck to paycheck. Most of the stress has been on you. I know you feel it, and I've seen it. And I feel...
BONNIE SILVERSTEIN: My hair didn't get white for nothing.
JAY SILVERSTEIN: I feel badly about that. Mine just fell out. So there's...
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JAY SILVERSTEIN: But 5, 6, $7,000 might go a long way toward helping us.
ARNOLD: Economists say it could help millions of other Americans, too. Jay says it would feel like getting a raise.
JAY SILVERSTEIN: Remember that? Remember when everybody used to get a raise? It's like a raise.
ARNOLD: But the Silversteins' old house was finally sold at a loss through what's called a short sale. And Freddie Mac, over the past two years, has tightened restrictions about that, which even prevent the couple from refinancing their new house.
Meanwhile, Freddie Mac has been benefiting because the Silversteins are stuck paying this higher-rate mortgage of nearly 7 percent.
INSKEEP: That's NPR's Chris Arnold. He's in our studios. We're also joined by Jesse Eisinger of ProPublica, who also reported on this story. Jesse, welcome to you.
JESSE EISINGER: Hi. Thanks for having me.
INSKEEP: And let me just make sure I understand the kind of homeowner who you say is being harmed here. We're talking about people who are in a house with a mortgage, and currently making the payments?
EISINGER: Right. These people are current on their mortgages. These aren't the subprime borrowers who bought houses they couldn't afford with crazy mortgages.
INSKEEP: OK. And so Freddie Mac is making it harder for them to refinance. Freddie Mac is also, you say, betting to make money that they will fail to refinance. What, Chris Arnold, is the investment exactly? How does it work?
ARNOLD: Well, the investment's complicated and that's why it's - probably - been below the radar. But one, simple way to look at this: Let's say Jesse and I were going to loan you, Steve, $100,000 to buy a house.
ARNOLD: And you would pay us principal, and you would pay us interest. And we'd collect that. And we'd be happy, and you'd be happy.
Let's say a little ways down the road, you decide to refinance.
INSKEEP: OK, lower interest rate...
ARNOLD: Lower interest rate, OK - you know, that happens. We would get the principal back, right? We would get our whole $100,000 that we loaned you, back.
ARNOLD: That's how it normally works. Now, what Freddie did is very different in that they sold off their right to collect that $100,000 back. They sold that to somebody else, and all they kept was the revenue from that 7 percent interest that you're paying.
INSKEEP: And so now, they're desperate to make sure I keep paying that 7 percent. Otherwise, they lose their bet.
ARNOLD: That's all they've got.
INSKEEP: Jesse Eisinger, is this undermining government efforts by the Obama administration, by people in Congress, to actually help people get into cheaper loans so they can make their mortgage payments?
EISINGER: This certainly gives Freddie a financial incentive to not support those programs, because they've made these bets, and these bets are highly concentrated. And in fact, Freddie has made it harder, through a lot of added rules and fees, for people to refinance - simultaneously.
INSKEEP: Is there some argument, though, that this is good for taxpayers? Because Chris Arnold mentioned, this is a company that has been bailed out to the tune of many billions of dollars. They're desperate to make money, and they're making these investments that may harm some homeowners - or, many homeowners - but at least, they're hoping to make a profit.
EISINGER: There is an argument for that. And the Obama administration, and the regulator that controls them, have to weigh helping out taxpayers generally and more specific, homeowners. But as Chris said, it's very possible that a lot of refinancings could help the economy, and taxpayers, in the long run.
INSKEEP: So this could be counterproductive for the public as a whole, Chris Arnold?
ARNOLD: Sure. I think there's one other thing that's important to understand - is that buying a house is very different than refinancing a house, and that the government is already on the hook for these mortgages. So to keep millions and millions of people stuck paying higher rates - some of them are going to be more likely to default. So in the long term, the argument is, look - short term, yes, it might cost a little money; long term, you're probably going to save the government money by allowing more people to refinance.
INSKEEP: NPR's Chris Arnold, thanks very much.
ARNOLD: Thank you.
INSKEEP: And Jesse Eisinger of ProPublica, thank you.
EISINGER: Thank you.
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INSKEEP: It's MORNING EDITION, from NPR News.