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STEVE INSKEEP, HOST:

One longstanding problem with helping homeowners is, you have to get so many people on the same page: borrowers, bankers, regulators - and also two giant, government-owned mortgage companies. Fannie Mae and Freddie Mac have huge influence over who can refinance.

As first reported on MORNING EDITION, Freddie Mac made it harder to refinance, and also invested billions of dollars betting that homeowners would fail to refinance. The report is prompting fierce criticism of Freddie Mac, and the regulator who controls it.

We spoke with two senators who proposed a bill to make refinancing easier. Republican Johnny Isakson and Democrat Barbara Boxer see a conflict of interest in Freddie Mac's actions.

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: Let's explain for people: Edward DeMarco, the person you say you blame, is the acting director of the Federal Housing Finance agency, which at the moment, is the conservator - effectively, the controller of Freddie Mac since the bailout started. Senator Isakson, your thoughts, here.

SENATOR JOHNNY ISAKSON: Well, all financial institutions and entities hedge. That's part of business. But there's a terrible conflict if you control on the one side, whether or not somebody can refinance, and then on the other side, you're betting on people not being able to refinance. Then you're motivated to actually do the wrong thing. That's the problem. And that's what Freddie Mac's going to have to answer.

INSKEEP: Senator Boxer said that she blames Edward DeMarco - named him. Do you blame the regulator here, DeMarco, as well?

ISAKSON: I think Mr. DeMarco needs to come forward and tell us what did happen. We have a situation that's - obviously - at best, unsavory and at worst, immoral. And I think the agency's responsibility is to come forward and tell us what happened and why it happened - and if this is true, to correct it.

INSKEEP: What's the Senate's role? Oh, Senator Boxer, go ahead.

BOXER: Well, I think it's important that I explain why I named a name here because I'm not one to do that. I had asked him to meet with me, and it just turned into an absolute row. He was - got his back up. This is not his interest. His interest is making sure Fannie and Freddie do well financially. He didn't have any motivation - that I could see - to help people. He - it was a - the worst meeting I've ever had in my life - honestly. And I know that he had to approve of these derivatives. He approves of everything Fannie and Freddie does.

INSKEEP: Are you sure that his management is detailed enough that he would have approved of this? You're certain of that?

BOXER: I believe that's his role. They can't do anything without his approval - that's my understanding.

INSKEEP: I want to mention that we've invited Mr. DeMarco on the program. We'll continue to do that. You have said that in your meeting with him, he insisted his priority is making sure that Freddie Mac is making money. We should clarify that, to be fair. This is a government-sponsored enterprise that was taken over, that had to be bailed out. Taxpayers are on the hook for many, many billions of dollars. Does he have a point?

BOXER: Sure, he does. But the fact is, they make money. When they refinance, Fannie and Freddie make money.

ISAKSON: If the derivatives were developed, and if the policies were developed, to make it harder to refinance, that's wrong on two counts. First of all, it would be morally wrong, in my opinion. But second of all, it'd be myopic. While you might financially benefit in the short run from the derivative, you have a greater benefit from a mortgage that performs until its maturity.

So I would submit - and I was in the real estate business for 33 years - I would submit that you ought to have a broad look and realize that you are better off, as the lender, to let the loan be refinanced at the lower rate, with a higher probability of being paid back in full, than you are to make it impossible to refinance and therefore, ultimately push somebody against the wall, to go for a strategic foreclosure.

INSKEEP: Is it time For Edward DeMarco, the acting director of this regulator, to be replaced by the president?

BOXER: He can't replace Edward DeMarco. As an acting, he can't be replaced. He could be replaced if we were to fill that position...

INSKEEP: With a nominee, with a full-blown nominee.

BOXER: ...with a confirmable nominee, but there's been a filibuster against the nominee.

INSKEEP: So is it the Senate's fault, then, that you don't have someone more satisfactory to you in that job?

BOXER: Well, in my view, we should give the president his pick. But in this atmosphere, there's just too many filibusters going on. And it's not just this position; it's many positions.

INSKEEP: Senator Isakson?

ISAKSON: Well, Mr. DeMarco's got a job that's comparable to the cruise director on the Titanic. I mean, he's got a difficult challenge. And I think we need to get all the facts on the table, and get to the central issue that Senator Boxer and I have talked about. And that is, if we find out that Freddie Mac is knowingly enhancing its position through these derivatives, that's a horrible fact.

When we get the facts on the table, then I'll be happy to talk about whether somebody should, or should not, have their job. But the first thing we need to do is - forget - who we're here to look after is the borrower that we're trying to help. They deserve to be able to refinance with contemporary rates and improve their monthly position.

INSKEEP: Granting that a home mortgage is a rather complicated transaction with a lot of parties - there's the borrower; there's the banker; there's Fannie or Freddie; there may be bondholders at the other end - do you believe that Fannie and Freddie are the heart of the problem right now, when we think about continuing problems in the mortgage market?

BOXER: Here's what I think. We're trying to get out of this great recession, and Fannie and Freddie can do something very good right now without legislation. It really is not that complicated. Either...

INSKEEP: But are they heart of the problem? Are they the bottleneck in your...

BOXER: Well, I'm not calling anyone the heart of a problem. They could be the heart of the solution. And they're not doing it.

INSKEEP: Senator Isakson?

ISAKSON: Well, Steve, let's be candid here, if you want to lay the fault blame. It goes back to predatory lending and subprime loans that were made. Freddie and Fannie ended up buying some at the direction of Congress.

INSKEEP: Because Congress wanted to encourage home ownership.

ISAKSON: That's where the blame belongs, and that's over and that's done with. Not to be my own self-interest here, but I've introduced legislation that does away with Freddie and Fannie over time and creates a new entity that goes back to the practices of good lending, sound financial policy - because ultimately, there is a role for the government in the housing market. But right now, we're in a difficult trough, in terms of values.

I would use the old analogy: If you're in a hole and - stop digging. We need to stop digging, and we need to start climbing out. And one of the ways we climb out is by helping people who are making their payments, who are performing, put more money in their pocket to be invested in the economy, and not by manipulating a derivative for the short-term self-interest of an agency.

INSKEEP: Johnny Isakson is a Republican senator from Georgia. Barbara Boxer, a Democratic senator from California. Thanks to you both.

(SOUNDBITE OF MUSIC)

INSKEEP: They're responding to reporting on this program, which you can find at npr.org. This is NPR News.

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