Why Freddie Mac Resisted Refis
by Jesse Eisinger, ProPublica.
Freddie Mac, the taxpayer-owned mortgage giant, made it harder for millions of Americans to refinance their high-interest-rate mortgages for fear it would cut into company profits, present and former Freddie Mac officials disclosed in recent interviews.
In closed-door meetings, two Republican-leaning board members and at least one executive resisted a mass refi policy for an additional reason, according to the interviews: They regarded it as a backdoor economic stimulus.
Freddie’s policy was financially brutal: During the worst years of the Great Recession, when homeowners most needed the savings they could have gotten from refinancing to lower interest rates, Freddie helped keep millions of borrowers locked in high-interest-rate mortgages.
A more aggressive refi program by both Freddie and its sister company Fannie Mae would have helped an additional nine million homeowners to refinance, saving them nearly $75 billion in interest payments to date, Columbia University housing economist Christopher Mayer estimates. In addition, it would have prevented hundreds of thousands of delinquencies and foreclosures, he says.
Freddie’s resistance to refis highlights a central conflict of interest that plagues both Freddie and Fannie. That conflict is even more pronounced now that they are owned by taxpayers. The companies, which own or back about 60 percent of U.S. home mortgages, have a mandate to help expand homeownership and also to generate profits. These goals can work at cross purposes.
Freddie and Fannie maintained and erected barriers to refinancings when the Obama administration launched a program in early 2009 specifically designed to make refinancing more accessible — the Home Affordable Refinance Program, or HARP. Freddie continued to hinder refinancings through a late 2011 relaunch of HARP designed to further slash refi costs and paperwork. At that point, Fannie began opening its gates more widely, but Freddie still kept barriers in place.
Only in the last few months, under a new chief executive, has Freddie loosened many of its restrictions on refinancing.
“Almost immediately after taxpayers bailed them out, Fannie and Freddie imposed unprecedented restrictions on refinancing, preventing millions of people from saving money on their mortgages and leaving hundreds of thousands of people to lose their homes unnecessarily,” says Mayer. Then after the 2011 HARP relaunch, “Freddie was worse” than Fannie, he said.
The Internal Debate
Now, interviews with former board members and an executive have revealed two reasons why Freddie dragged its feet.
According to interviews, these officials feared that mass refinancing would hurt the company’s bottom line and therefore its ability to repay taxpayers, who had bailed out Freddie and Fannie in 2008 to the current tune of almost $142 billion. Fears that borrowers who got refis would suffer high rates of default anyway, costing Freddie, have not been borne out.
Internally, Freddie debated its compliance with HARP for years. Robert Glauber, who left Freddie’s board in March, contended in board meetings that aspects of the refinancing program were “designed to be a stimulus” for the economy, said John Koskinen, who served as Freddie Mac’s chairman from 2008 to 2011, during which time he also served briefly as its interim chief executive.
Glauber, director Linda Bammann and head of risk management Paige Wisdom resisted mass refis. One executive viewed their objections as colored by partisan unwillingness to help the economy recover, something that would benefit President Obama.
But Koskinen did not regard the discussion as partisan. “I don’t think we ever had a discussion of whether this was good for a Democratic administration.”
Glauber was a Republican appointee to the Treasury Department under President George H. W. Bush and has had a career in various Wall Street roles. In a brief email to ProPublica, he disputed a quotation attributed to him but did not comment on the substance of the internal debates. He wrote that “it is an outrage that what claim to be confidential discussions in the board room are aired in your publication.”
Bammann, who donated $250 to the National Republican Congressional Committee this year, declined to comment. Wisdom did not respond to requests for comment.
Freddie Mac declined to make an executive available. The company is “always trying to find a balance to stimulate borrowing on responsible terms at prices that protect us from risk,” a spokesman said. The new CEO, Donald Layton, has made it clear that making changes to the company’s refi program is “a major priority,” the spokesman said. And he pointed out that Freddie has streamlined its refi process outside of the HARP program as well.
The spokesman declined to comment on Freddie’s internal discussions.
HARP was intended to lower barriers to refinancing for borrowers, especially for those who have high loan balances or owe more than their homes are worth, known as being underwater. But HARP has disappointed in part because of Freddie and Fannie’s restrictive refi rules.
When the program was overhauled late last year, Freddie retained more restrictions than Fannie, puzzling many housing experts.
Still, after the HARP overhaul, refis have risen. Freddie Mac has done more than 284,000 HARP refis this year through August, compared with 185,000 for all of last year. Fannie has done 334,000 in the same period, compared with 215,000 last year. In all, the two companies have done more than 1.6 million refis under the program. The administration’s initial goal was to help four to five million.
Concerns about providing a stimulus were not the only reason for Freddie’s restrictions. Several company executives and board members worried that doing mass refis would hurt Freddie Mac’s bottom line.
To appreciate this concern, it’s crucial to understand Freddie’s and Fannie’s business. The companies are two-headed beasts: One part is an insurance company with a public mission to help the housing market and the other is an investment fund that generates profits by trading mortgage investments. The investment side existed originally to keep the mortgage securities markets flowing. But as the portfolios grew in the years leading up to the financial crisis, the tail began to wag the dog. The huge profits from the portfolios inflated executives’ pay packages and began to overshadow the public mission of helping homeowners, critics say.
Refinancings can hurt the value of those portfolios. When a new, lower-rate mortgage is issued, the old loan is paid off. The ultimate backer of that original loan — in this case Freddie or Fannie — takes a loss because the loan was “pre-paid,” meaning it was paid off earlier than expected. Mortgage securities make money from interest rates paid over time, so they decline in value if the flow of interest payments gets cut off, such as when a refi allows the original loan to get paid off early.