This morning on KQED Public Radio, NPR gave a disturbing report about FreddieMac and U.S. homeowner’s, including Bay Area homeowner’s, ability today to refinance their home mortgages. NPR said FreddieMac, a pseudo-federal government agency that helps U.S. residents from all across the nation buy homes, is betting homeowners won’t be able to refinance in the existing housing market. And FreddieMac will profit from the inability of homeowners to refinance.
NPR said one of the reasons Freddie has an incentive to bet against homeowners is the agency has sold off the principal of many or all of the mortgages it holds; the agency will only make money on the interest on the mortgages. So if homeowners pay less interest, the agency makes less money.
The report did say that Freddie needs to make money because the agency was bailed out by the federal government in the housing recession/depression. So the money it makes will help keep the agency solvent, or perhaps help it pay back some of the money the federal government used to bail it out.
But, U.S. citizens may be better off on the whole if the agency makes it easier to refinance. The agency may make less money in the short-term as people refinance at lower interest rates. But in the longer-term, FreddieMac will make more money as less homeowners default on the mortgages. Less people will default because refinancing a home loan at a lower interest rate reduces a homeowner’s monthly mortgage payment. One homeowner NPR interviewed would save $500.00 per month on their monthly mortgage payment by refinancing in today’s market.
If FreddieMac has an incentive to keep homeowners from refinancing because the agency will gain from doing so, this is a disturbing situation.