According to a report published on the ProPublica website, the taxpayer-owned government-sponsored enterprise (GSA) Freddie Mac resisted refinancing the mortgages of millions of Americans from high interest rate home loans out of worry that it would cut into Freddie’s profits.
More than 10.8 million Americans have underwater mortgages. This figure represents about 22% of all homeowners with mortgages. The inability for many of these homeowners to receive financial relief in an environment of record-low interest rates constitutes one of the major failures of President Obama’s administration.
Cost Homeowners More than $75 Billion
Many economists and housing market analysts criticize the lack of aggressiveness by the government-sponsored enterprises (GSA) Freddie Mac and Fannie Mae to help out financially strapped homeowners who could have benefited from savings engendered by reduce monthly mortgage payments.
Christopher Mayer, a Columbia University housing economist, estimates that an additional 9 million Americans could have refinance from high-interest rate mortgages to low-interest rate home loans. This would have saved homeowners nearly $75 billion in mortgage interest payments.
Furthermore, the extra money could have served as a stimulus as consumers could have spend the savings on goods and services to help support the weak economy.
Freddie’s Director and Other CEOs
The former governor of New York Eliot Spitzer reveals that Robert Glauber, a Freddie Mac board member and former CEO of the NASD, was one of the leaders of the opposition to refinancing home mortgages owned or insured by Freddie Mac.
Spitzer characterized Glauber and other CEOs as possessing a “warped world view” as they worked feverishly to oppose mortgage refinancing to middle-class home owners. Simultaneously, these CEOs justify receive perks from the investment banking community in the form of access to Initial Public Offerings (IPOs) just before the collapse of the economy.
Had Freddie and Fannie directors taken appropriate actions, they could have prevented hundreds of thousands of delinquent mortgage payments and foreclosures. Since 2007, more than 4.5 million Americans lost their homes to foreclosure.
GSAs Have Conflicting Interest
The GSAs own or insure about 60 percent of the home mortgages in the U.S. One of the major criticisms of Freddie and Fannie has little been the conflict of interest that exists within their charters, which have a two-fold mission:
- Expand home ownership
- Generate profits
Fannie and Freddie have provided the most obstacles to the success of the Home Affordable Refinance Program (HARP). When HARP began in early 2009, it was supposed to make mortgage refinancing available to 3 to 4 million homeowners. But conditions like the 125 percent cap on loan-to-value ratio provided an refinancing impediments that most homeowners simply could not overcome.
The Federal Housing Finance Agency (FHFA) overhauled the HARP in late 2011. The agency streamlined the program by reducing paperwork and cutting refinancing closing costs. Fannie Mae became more receptive to helping homeowner refinance their mortgages. Freddie continued to make it difficult for borrowers to refinance into low-interest rate loans.
Profits and Politics
An executive and some past board members of Freddie state that the main opposition against mass mortgage refinances centered on how the plan would affect Freddie’s profits and its mandate to repay money used to bail out the entity.
Since Congress put the GSAs under the receivership of the FHFA in 2008, Fannie and Freddie have received almost $142 billion in taxpayer money. Freddie rationalized the decision not to help borrowers by saying that they would have high rates of mortgage defaults even after refinancing into low-rate home loans.
Another Freddie executive said the objections to mortgage refinancing also had to do with the desired to hurt President Obama’s re-election chances by hindering his efforts to revive the economic.
With the installation of a new chief executive office, Freddie Mac has removed many of the hurdles to mortgage refinancing that plague the agency.