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Freddie Mac Good For Business, Bad For Homeowners?


I'm Jacki Lyden, and this is TELL ME MORE from NPR News. Michel Martin is away today.

Coming up, after last night's Super Bowl, the NFL season may be over but the buzz over Super Bowl ads is still going strong. Snoozing or stirring, we'll talk winners and losers of last night's ad war and what you thought of Madonna in just a few minutes.

But first, we focus on the nation's housing crisis. President Obama unveiled a proposal last week intended to kick start a housing market that's been dragged down by foreclosures and declining home prices for years. The crux of the plan is to make it easier for homeowners locked in at higher interest rates to take advantage of today's record lows.

In the same week the president's housing proposal was unveiled, NPR in conjunction with the independent investigative newsroom ProPublica broke a story about questionable practices by Freddie Mac, the government-owned mortgage giant. The reports reveal that Freddie had invested billions of dollars in securities that bet against homeowner's ability to refinance their loans. In other words, some investments by Freddie Mac could be more profitable if homeowners were unable to refinance their homes.

Here to talk more about this is NPR's Chris Arnold who did the investigation for NPR. Chris, welcome to the show.


LYDEN: Chris, remind us about what you and ProPublica discovered that Freddie Mac was doing and why it raised red flags all over town.

ARNOLD: Sure. Well, I was working with Jesse Eisinger who's a reporter for ProPublica and we found out that Freddie Mac, which we should say guarantees mortgages like Fannie Mae does, its sister company. So, Freddie and Fannie are a big part of who gets to decide, all right, you qualify for a refinance or you don't. And Freddie Mac has all sorts of criteria. You know, you have to have this kind of credit score and you kind of had a short sale or a foreclosure in your recent history and stuff like that.

What we found was that at the same time that Freddie Mac was tightening those credit standards that is making it harder to refinance, the company was also going out into the market and betting against homeowners' ability to refinance and not just small bets. You know, we're talking about $5 billion in bets that are linked to 20 and maybe up to $30 billion worth of mortgages tied to 100,000-plus homeowners.

So, these - that's involved a lot of money and a lot of people. And, really, Freddie entered into a kind of financial bet where if Jane Doe gets to refinance her loan from 7 percent down to four, Freddie Mac loses money. If she can't, Freddie Mac makes money. And we were raising the question, you know, is this inappropriate for somebody who's creating the standards to be betting against homeowners.

LYDEN: And you mentioned about 100,000 homeowners have been touched by this. And were most of them in good standing on their loans?

ARNOLD: Yeah. You know, these are not people who got subprime loans or who missed a lot of payments. These are, you know, Americans - some of them are struggling, you know, a spouse may have lost a job and we're coming out of this recession. And we found this one family where, you know, they're very paycheck to paycheck living in Pennsylvania. And $500 a month they would save if they could refinance and that would be a really big deal to them. But they're stuck and a lot of people are stuck, upwards of 10 million people by some economist estimates.

LYDEN: Chris, as we mentioned, this got a lot of attention and our colleague Steve Inskeep, the host of NPR's MORNING EDITION, interviewed Edward DeMarco and he is the acting director of the oversight agency, the Federal Housing Finance Agency, which oversees both Freddie Mac and Fannie Mae. Here's what he told Steve. He said he was completely puzzled that something immoral was going on. Here's a bit of that.


EDWARD DEMARCO: I think I have a responsibility to make sure Fannie Mae and Freddie Mac undertake activities that don't cause further losses to the American taxpayer. We have a responsibility to ensure that the housing finance system works efficiently and effectively. That Fannie Mae and Freddie Mac's role in it is to bring stability and liquidity to that market and to do so in a credit-worthy manner.

LYDEN: Now, Chris, as you know, part of Freddie's mission is to help expand opportunities for homeownership for Americans. But many observers say the housing crisis was in part because the organization didn't pay enough attention to the need to run an effective business. So, is there evidence that Freddie Mac's choice to essentially bet against refinancing for certain homeowners worked as a sort of business strategy?

ARNOLD: Well, there's a couple of points to make there. And, first, let's say right off, we found no evidence that there are people inside of Freddie Mac that were saying: Aha, you know, we can make more money if we inappropriately keep homeowners from refinancing. And then we make these bets and so, this is a big intentional thing that we're doing that we know is wrong.

Well, we didn't find that. There wasn't a link that we were able to uncover between tightening credit for homeowners and placing these bets in the marketplace. We're just pointing out that there is a tension there, a conflict there. Should the same company really be allowed to set policy and then bet against people related to that policy, because of the potential for that to happen? But there are a couple things, too.

What Mr. DeMarco was saying - part of that is, look, yes, OK, we're making money here. And it's appropriate for us to make money. We need to protect taxpayers and we're already on the hook for billions of dollars. Freddie and Fannie have lost billions of dollars. He's been criticized, though, for having a short term - forgive the term - sort of beam counter sort of approach to saving taxpayers money. And there's a lot of economists who say, look, if you loosened up credit more for homeowners to allow them to refinance in the long term that would save taxpayers more money than if you were really tight-fisted about things.

LYDEN: Just pause there a moment. If you're just joining us, you're listening to TELL ME MORE from NPR News. We're talking about the nation's housing crisis with NPR's Chris Arnold who helped break a story last week involving the government-owned mortgage giant Freddie Mac and its practice betting against some of it's homeowners.

And joining us now with another window on the housing crisis is Arturo de los Santos. He's a former Marine who says he tried multiple times to restructure his loan for his home in Riverside, California but he was denied a modification of that loan. Mr. de los Santos, welcome to the program.

ARTURO DE LOS SANTOS: Thanks for having me on.

LYDEN: Now, let me say you're in a complicated situation. You're trying to work with Freddie Mac to help modify your loan so that you can start to make payments again. You were evicted last summer. In December, you and your family decided to reoccupy your home. Why did you decide to do that?

SANTOS: Well, what happened in my case, I tried for loan modification. They put me on the trial payments. I made my trial payments on time. I sent my fourth trial payment. It was rejected. And I called the bank and asked them why they rejected my money. They said my modification had been denied, and they weren't accepting anymore of my money.

So, I asked them what I should do. They had me re apply for another loan modification. That was also denied. I had already explained to them my income had recovered, and I could make my original payments if they couldn't modify my loan and they refused accepting more money. So, the second modification did not go through. I ended up doing a third modification. So, during the third loan modification, we received a call a day before our house goes to auction. And I called JPMorgan Chase and asked them why are you going to sell the house. And they said, well, we have two departments, a foreclosure department and a loan modification department. Our foreclosure department decided to sell the house.

LYDEN: OK. So, they didn't give you a chance. Chris, now Mr. de los Santos issue is another facet of this crisis. How well has the Obama administration done so far in finding help for homeowners who need loan modification to stay in their homes?

ARNOLD: Right. And this, we should say, is separate from the investigation that we were conducting about refinancing. Now, we're getting into the whole realm of foreclosure prevention. And there are a lot of problems here too. For years, there has been a program on the books from the Obama administration. It's called the Home Affordable Modification Program or HAMP.

And then when we looked at this as reporters when it first came out, this sounded really good and the administration was saying, look, we can reach four million - three to four million homeowners. But there have been tons of problems. I mean, so far, less than a million people have been reached. And a big part of the problem is that, where the banks interface with the homeowner here - you heard Mr. de los Santos say that he was dealing with JPMorgan Chase. It sounds like Freddie Mac might own his loan, but JPMorgan Chase is the bank that manages his loan, and that's the bank that he sends the payments to.

There are lots of different organizations involved. They all have different incentives. And there have been so many reports of homeowners faxing stuff in again and again and again. And then the bank says, we didn't get it or, oh, we lost it or we've got to start all over again. And people get strung along for months and months and months.

And not to say that every homeowner out there deserves a loan modification and has the ability to stay in their house, but there are millions who do, and they've been having no end of trouble. And Mr. de los Santos' case is one of those, it sounds like.

LYDEN: Mr. de los Santos, the sheriff has notified you that they may come and remove you and your four children. What's going on? How do you think this is going to end for you?

SANTOS: Yes. On February 2nd, we had court, and the judge did sign the order to evict us. And about two weeks after we were evicted, we received a letter from Chase saying they were going to adjust our payments.


ARNOLD: You mean, saying that you were going to get this loan modification?

SANTOS: Correct. And this goes back to where - what they call dual tracking to where two branches within the same bank aren't working together. They foreclosed on the property while the other branch was still working on our loan modification.

LYDEN: What's it like to try to communicate with Freddie Mac for you, Mr. de los Santos?

SANTOS: We spoke with - we were able to speak with Freddie Mac and I contacted Freddie Mac and they said - I explained to them our situation, what had gone on with our loan. And I told them about the letter that adjusted our payments. And they said, well, you need to contact Chase about that. And they refused to give us any number to Chase, so it's really hard to communicate with the banks when you try to work with them. It's really hard to get a straight answer from them.

LYDEN: Chris, we started off with the Freddie Mac investigation and it may also be a good place for us to end. Members of Congress say the incident should be investigated further. Is that happening?

ARNOLD: Well, we've had senior members of Congress, Republicans and Democrats, firing off letters to the White House, letters to regulators saying we want to find out more about what's been going on at Freddie Mac regarding these investments. And they've gotten some information back from the regulator and Mr. DeMarco. Some of this might come up in hearings on Thursday of this week, but safe to say there is still a lot of digging going on.

LYDEN: NPR's Chris Arnold investigated the Freddie Mac story for NPR and he joins today from Boston. And Arturo de los Santos is a former Marine who resides in Riverside, California with his wife and four children and he's trying to fight eviction from his home in Riverside, California, and he joined us from there. Thank you again, both of you.

SANTOS: Thank you.

ARNOLD: Thanks, Jacki. Transcript provided by NPR, Copyright NPR.