Tuesday, January 31st, 2012 at 9:56am

Freddie Mac Makes Sound Investment…Against Itself

Posted by Ron Ballard

[The following is an article from John Grant. I don’t usually post articles or editorials by others, but this one, released today, is worth posting. The author, John Grant, represents residential real estate investors in Washington, D.C. Mr. Grant also works with hedge funds, investment banks and insurers. Mr. Grant is a graduate of The Johns Hopkins University in Baltimore, MD. He is the government relations representative of www.distressedpropertycoalition.com (DPC). Ron Ballard is a member of DPC, providing legal and business analysis and advocacy.]

In the interest of full disclosure, I have to admit that part of me was impressed upon hearing the latest debacle underway at Freddie Mac. Imagine if you had access to an investment vehicle allowing you to bet that Freddie Mac’s efforts to refinance its toxic portfolio would fail? The only investment opportunity that would equal this in the past 20 years would be those that allowed investors to bet against Freddie Mac before the housing crisis.

Well, such a product does exist. Shockingly, this genius product is the brainchild of Freddie Mac’s business unit, the authors of the 2008 housing crisis. Known as “inverse floaters”, the business unit has invested billions that its loan refinances will fail. Even more surprising is the source of this information. Not some right-wing blog or anti-government publication with an ax to grind. The source is none other than National Public Radio.

The immediate conclusion that must be drawn from this revelation is clear and undeniable: the Obama Administration and Congressional leadership can no longer argue that government solutions to the housing crisis are viable. More bluntly, they are laughable. We now know that the very institution these programs are designed to resurrect have bet billions that they would fail. Those bets are the smoking gun evidence that government solutions are a waste of time.

Our coalition’s brawl with Freddie Mac is well-documented, but worth revisiting given this new information. Freddie Mac has attempted to criminalize private homebuyers who purchase distressed properties, repair them, and resell them on the retail market. Freddie Mac CEO Robert Haldeman has made false claims that the resale of distressed properties constitutes mortgage fraud. Freddie Mac has provided false information to the Federal Bureau of Investigation to bolster its fight against the private market.

When Freddie Mac lawyers conceded to me that their claims of mortgage fraud were not “legal opinions”, it tried a new tactic. Freddie Mac forced banks to adopt affidavits for buyers preventing resale of its distressed assets, thus delaying its unwinding and concealing the real value of its properties. DPC brought its case to Congressional oversight committees in the hopes of an investigation or at least a hearing into how Freddie Mac is treating the private market.

Despite numerous hearings, Congress failed to ask any probing questions into the practices at Freddie Mac. Two monumental moments do stand out from these hearings, which largely focused on how much Freddie Mac spent on dinners and public relations campaigns used to smear the private market. When Mr. Haldeman, who earns $6 million annually to oversee Freddie Mac, was asked about Freddie Mac’s current portfolio of adjustable-rate mortgages, he stated that he had no idea. Six million per year, and he has no idea of the ongoing threat to taxpayers his institution posed. Apparently, no one in Congress finds this particularly surprising or problematic.

Second was the heartfelt apology offered by House Financial Services Committee Chairman Spencer Bachus to Mr. Haldeman and his counterparts at Fannie Mae and FHFA. Why was this apology monumental? We know Fannie and Freddie have provided false information to Congress when it estimated total taxpayer liability at $2 billion (the real number was at least $200 billion). The Securities and Exchange Commission is currently handling the investigation. Furthermore, the proven incompetence at Freddie Mac evident in its perpetual need for taxpayer funds merits serious oversight, not an apology.

The position of DPC over the past year has never wavered: private market solutions are the road that must be travelled to achieve a real housing recovery. Once housing recovers, the overall economy will follow. Despite meaningless rhetoric, Congressional leadership has so far stood by Freddie Mac and allowed it to engage in likely illegal conduct by interfering with what homebuyers can do with the homes it purchases from the failed institution.

Now that we know Freddie Mac is actively betting against the solutions offered by the government, Congress has no choice but to allow the private market back into the process of unwinding Freddie Mac. The question for Congressional leadership is simple: how much humiliation are they willing to endure by an entity which has absolutely no idea what it is doing and exists only to serve itself? When will Congress decide to get back into the business of housing policy and serve its constituents by allowing a private market unwinding of Freddie Mac?

In the final analysis, this decision comes down to credibility. Private distressed property buyers never lied to Congress and never took a taxpayer bailout. Yet they have been shut out and shut down by Freddie Mac, which continues to waste taxpayer dollars, continues to conceal information from Congress, and can apparently only succeed if the market crashes. So far, Congress has sided with Freddie Mac. Let’s hope this new revelation is the last straw.

One Response to “Freddie Mac Makes Sound Investment…Against Itself”

  1. Re:”Freddie Mac forced banks to adopt affidavits for buyers preventing resale of its distressed assets, thus delaying its unwinding and concealing the real value of its properties”

    I fund Hard Money loans. This week a day after we funded and one day before Foreclosure Sale GMAC required not only buyer, but buyer’s broker and LENDER to sign and have notarized the affidavit. In it, it noted flipping in 90 days is illegal and a fraud for profit scheme. We pulled it off but I thought it was a crazy bank request. Now I see why. Thank you for the post.

    Colleen Bigler
    Loan Solution Inc.

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