Watchdog to evaluate Freddie Mac's use of floaters

A federal watchdog recently announced it would examine Freddie Mac's use of a mortgage derivative after reports were released indicating the investments gave the mortgage company an incentive to prevent borrowers from refinancing their homes loans to avoid foreclosure.

The watchdog investigation comes in response to a report from ProPublica and NPR News claiming Freddie Mac had a conflict of interested that could persuade the lender to prevent homeowners from refinancing their loans and take advantage of the historically low mortgage rates. The government sponsored mortgage entity denied all claims that its investment in mortgage derivatives is influencing decisions and policies regarding refinancings, according to the Wall Street Journal.

The Federal Housing Finance Agency recently announced that Freddie Mac stopped making investments in derivatives known as inverse floaters in 2011. The transactions ceased after a regulatory exam raised questions about the mortgage lender's control and influence in refinancing policies, and the announcement was made in response to ProPublica's claims, according to Bloomberg.

Freddie Mac stood to gain profit from billions of dollars in investments that required homeowners to remain in their existing mortgages with high interest rates in order to succeed. If these homeowners were to refinance to a more affordable repayment plan, Freddie Mac could lose significant funds. Since 2008, both Fannie Mae and Freddie Mac have cost U.S. taxpayers more than $150 billion in bailout aid, and were taken into conservatorship before potentially collapsing from the subprime mortgage crisis, the source reported.

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