FHFA OIG REPORT | Oversight of Freddie Mac’s Investment in Inverse Floaters

Oversight of Freddie Mac’s Investment in Inverse Floaters

The Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Mortgage Corporation (Freddie
Mac) (collectively, the Enterprises) manage investment,
funding, and hedging portfolios valued at more than
$1.4 trillion. These capital markets businesses encompass a
diverse range of sophisticated financial products. Although
generally profitable, certain sectors of the Enterprises’
capital markets businesses have lost tens of billions of dollars
since the Enterprises entered into conservatorships overseen
by the Federal Housing Finance Agency (FHFA or Agency)
in September 2008. For this reason, the FHFA Office of
Inspector General (FHFA-OIG) initiated a series of
evaluations relating to FHFA’s supervision of the
Enterprises’ capital markets businesses.

Among other capital markets activities, Freddie Mac
structures and markets a family of bonds known as
collateralized mortgage obligations (CMOs). Freddie Mac
may tailor these products to the specific interests of investors.
According to FHFA and Freddie Mac, as investor appetite
for floating-rate bonds increased in the spring of 2010,
Freddie Mac capitalized on the opportunity to charge a
premium for structuring these bonds by carving them out
of its securitized mortgages. In the process, it retained
by-product variable rate bonds known as inverse floaters.
In late January 2012, these inverse floaters became the
subject of significant attention. It was asserted that, because
the value of inverse floaters decreases when the underlying
mortgages are refinanced, Freddie Mac could deliberately
limit loan refinancings in order to protect the value of its
inverse floaters.

On January 31, 2012, Senator Robert Menendez requested
that FHFA-OIG examine Freddie Mac’s use of inverse of
floaters.

Full report below…

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Oversight of Freddie Mac’s Investment in Inverse Floaters

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