12-01-2021  4:25 pm   •   PDX and SEA Weather
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NORTHWEST NEWS

Sen. Manning on the Year Ahead and the Year That Was

Prominent BIPOC Caucus member concerned with gun regulation, access to Covid-19 testing

Dozens of Oregon Workers Fired for Not Getting COVID Shot

Officials in Oregon say at least 99 state workers have been fired for failing to get vaccinated against COVID-19.

Attorney General Rosenblum Says She Won’t Run for Governor

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Portland’s Black Population Grew in the Last Decade, but That’s Not the Whole Story

The Black population in North and Northeast Portland declined by 13.5% over the last 10 years as more than 3,000 Black residents moved away, new numbers from the 2020 census show.

NEWS BRIEFS

Oregon's Cannabis Industry Could Be More Vulnerable Than Ever

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Commissioners From Three Counties Select Lawrence-Spence to Fill Senate District 18 Vacancy

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Congressional Black Caucus Issues a Statement on the Passing of Former Congresswoman Carrie P. Meek

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Vsp Global Partners With Black EyeCare Perspective to Eliminate Inequities and Increase Representation of People of Color in the Eye Care Industry

Partnership includes scholarships, leadership development, and outreach to prospective optometrists ...

COVID vaccines becoming tougher to find in some places

PORTLAND, Ore. (AP) — Vaccines have suddenly become scarce in some parts of Oregon after months of vaccine surplus in the state and across that nation, officials said. The situation is a dramatic shift from the late spring, summer and early fall, when Oregon tossed out over...

Kentucky author and 'Merry Prankster' Ed McClanahan dies

LEXINGTON, Ky. (AP) — Ed McClanahan, a Kentucky author, teacher and friend of counterculture icon Ken Kesey, died Saturday at his home in Lexington, according to his wife. He was 89. McClanahan lived in Lexington with his wife Hilda, who remembered him as a “great man.” ...

No. 25 Arkansas beats Missouri, caps best season since 2011

FAYETTEVILLE, Ark. (AP) — Sam Pittman grinned for almost the entirety of his postgame press conference Friday night. The Arkansas coach and his team had done something no others ever had. The No. 25 Razorbacks capped their regular season with a 34-17 victory over Missouri,...

Mizzou's Drinkwitz returning to Arkansas for rivalry game

FAYETTEVILLE, Ark. (AP) — Just 45 miles of interstate highway separate Eli Drinkwitz from where he started and where he is now as Missouri's head football coach. Raised in the small Arkansas town of Alma, Drinkwitz will come full circle Friday when his Tigers visit No. 25...

OPINION

State is Painting Lipstick on Its One-of-a-kind, Long-term-care Law

Starting in January, the unpopular law imposes a stiff new tax of 58 cents per 0 earned for every worker in the state ...

Giving Thanks

Just by being alive we can be sure of having moments of sadness as well as happiness. When you’re active in politics, you experience both wins and losses. Sometimes it can be hard to feel grateful. ...

Acting on Climate will Require an Emphasis on Environmental Justice

Climate change affects us all, but its effects aren’t distributed equally. ...

Small Businesses Cannot Survive With Current Level of Postal Service

At The Skanner News office we received an important piece of correspondence that was postmarked June 12, 2021, and delivered to us on November 4, 2021. ...

AFRICAN AMERICANS IN THE NEWS

Study: WNBA again earns A-plus grades in diversity hiring

A diversity report has awarded the WNBA high grades again when it comes to racial- and gender-hiring practices. The Institute for Diversity and Ethics in Sport (TIDES) at the University of Central Florida Wednesday issued an A-plus to the WNBA for the league’s overall, racial...

Police shooting raises questions over Black man's gun rights

VIRGINIA BEACH, Va. (AP) — Leaders in the Black community of Virginia Beach called Wednesday for a federal investigation into the fatal police shooting of a Black man, saying his right to carry a gun for protection was ignored during a night of violence earlier this year on the city's oceanfront....

Death of bullied Utah girl draws anger over suicides, racism

DRAPER, Utah (AP) — When her 10-year-old daughter tried spraying air freshener on herself before school one morning, Brittany Tichenor-Cox suspected something was wrong with the sweet little girl whose beaming smile had gone dormant after she started the fifth grade. She...

ENTERTAINMENT

Review: Leaving the Children of God 'sex cult'

NEW YORK (AP) — “Sex Cult Nun” by Faith Jones (William Morrow) Faith Jones’ vivid memoir “Sex Cult Nun” chronicles her 23 years in the infamous Children of God cult and her slow journey to leave. Born into the cult in 1977 in Hong Kong, Jones was cult royalty, the...

Review: Animated doc 'Flee' tells young refugee’s journey

Filmmaker Jonas Poher Rasmussen was 15 when he encountered a new face on a local train in his sleepy Danish town. It was the kind of place where immigrants couldn’t help but stand out, but Rasmussen noticed this kid’s style first. He had some and most people there didn’t. ...

Parton, Oh, Biles and teachers named 'People of the Year'

NEW YORK (AP) — People magazine has named Olympic gymnast Simone Biles, actor Sandra Oh, country icon Dolly Parton and the nation's teachers as its “2021 People of the Year.” “This year has been a transformative one, pushing us all to create something new and hopefully...

U.S. & WORLD NEWS

Death of bullied Utah girl draws anger over suicides, racism

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Baldwin to ABC about shooting: 'I didn't pull the trigger'

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Former player, labor lawyer lead MLB into 9th work stoppage

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South Korea confirms first five cases of omicron variant

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UK police investigating antisemitic hate crime in London

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WHO nations launch steps toward deal to fight pandemics

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Cora Currier Propublica

Mortgage giant Freddie Mac did not keep homeowners trapped in high-interest loans in order to boost profits on billions of dollars' worth of complex financial bets it had made. That's the conclusion reached in a report released today by the inspector general that oversees the agency in charge of Freddie Mac.

Last January, ProPublica and NPR reported that Freddie had dramatically expanded its holdings of mortgage-backed securities that would profit if homeowners stayed in their existing high-interest-rate loans. At the same time, the company had taken steps that made it harder for homeowners to refinance at lower interest rates. Our report stated that there was no evidence of a coordinated attempt to bet against homeowners' ability to refinance. The inspector general's report concludes that there was none.

But the inspector general left a key stone unturned: It did not independently evaluate the firewall within Freddie Mac designed to keep Freddie's investment arm from profiting from insider information about the mortgage giant's plans to tighten or loosen homeowners' access to credit. Instead, the inspector general relied on the word of employees it interviewed and conducted no further investigation. It also reported that the agency that oversees Freddie has not tested the firewall's integrity.

Freddie Mac and its sister company Fannie Mae were bailed out by taxpayers after the financial crisis and are now controlled by the Federal Housing Finance Agency. Freddie and Fannie guarantee most of the mortgages in the U.S., and they have a mission to make home loans more affordable. But Freddie also has a massive investment portfolio and has to protect against losses. Sometimes, those two goals can conflict.  

Beginning in 2010, Freddie Mac expanded its portfolio of a particular kind of mortgage-backed security known as an "inverse floater." The company offered investors a relatively safe bond with a floating interest rate. It then kept on its books what is called an "inverse floater," which pays out the highest returns if borrowers stay in their mortgages. When interest rates dropped (as they did during that period), Freddie Mac stood to profit on its inverse floaters, because the rates being paid by the pool of borrowers were higher than the prevailing market rates. Inverse floaters lose that advantage the more that homeowners in the pool refinance at the lower rates. 

The report says that Freddie's investment wing increased its holdings in inverse floaters merely because investors were demanding the floating rate bonds linked to them — not because of any strategy to exploit homeowners trapped in high-interest-rate mortgages.

Freddie Mac has an  "information wall" designed to separate the employees running Freddie Mac's investment strategy from those designing and carrying out its policies that impact the mortgage market, such as programs aimed at helping people refinance or making it more difficult for them to do so. The inspector general's report says that it found "no evidence" that the wall had been breached.

Yet, the inspector general noted that FHFA has not conducted any independent testing of Freddie's information wall. And the inspector general limited its own investigation of the wall to interviewing Freddie executives and FHFA officials and reviewing policy documents. The inspector general "did not independently evaluate the efficacy of Freddie Mac's information wall policy," the report states.

The report emphasizes that there are indeed "tensions between policies aimed at homeowners refinancing and Freddie Mac's retained investments." But it says that such tensions are not unique to inverse floaters but are "inherent throughout [Freddie and Fannie's] various business lines."

At the end of 2011, Freddie held about $5 billion worth of inverse floaters, according to the report, or less than one percent of its $653 billion investment portfolio.

The report also notes that the company hedges to balance its interest-rate risk, meaning that it places many different bets so that no matter whether interest rates rise or fall, its investments will be close to "net flat" — stay roughly the same, recording neither large profits nor large losses. Freddie does not try to balance the risk of each individual investment, but rather hedges "on its portfolio as a whole."   The report explains:

In the context of inverse floaters, although Freddie Mac may on the one hand benefit from a trend of low interest rates and reduced prepayments by homeowners, on the other hand, Freddie Mac's other investments may equally suffer from such a trend. Thus, the end result, if perfectly hedged on interest rates, is that Freddie Mac's overall position will remain the same regardless of prepayments.  

The inspector general did not independently evaluate Freddie's hedging strategies. When ProPublica and NPR first reported on these deals, it was unclear what kind of hedging, if any, Freddie Mac had performed.

The company is also supposed to be reducing its investment portfolio as part of the terms of its government bailout. In a footnote, the inspector general's report mentions that Freddie Mac told the Securities and Exchange Commission that selling the floating rate securities was a way to reduce its balance sheet. But most Freddie and FHFA officials interviewed by the inspector general said that reducing its balance sheet was not the motivation for Freddie to create inverse floaters, even if that was the result.

Separately, the way Freddie structured the inverse floaters leaves Freddie with nearly all of the risk of the assets that no longer show up on its balance sheet. The reason: As the guarantor of the mortgages that back the securities, Freddie is already on the hook if the homeowner defaults. With inverse floaters, it also retains the risks that homeowners might refinance and that overall interest rates might rise. Indeed, independent analysts told ProPublica and NPR in January that Freddie may actually have increased its risk, because inverse floaters are illiquid and hard to sell.

In its written response to the inspector general's report, the FHFA did not address Freddie Mac's statements to the SEC. When contacted by ProPublica, an FHFA spokesperson declined to comment.

The report said that FHFA issued misleading statements to the public on when it ordered Freddie to stop creating inverse floaters. According to the report, in the spring of 2011, the FHFA began a review of Freddie Mac's mortgage securities operation, in large part to determine whether the company held too many complex and risky mortgage products, including inverse floaters.

But an executive at Freddie didn't suspend inverse floaters and certain other complex securities deals until January 6, and FHFA didn't explicitly order Freddie Mac to stop selling inverse floaters until January 30, 2012, after ProPublica's story was published. In fact, according to the report, that day marked "the first time that FHFA's senior leadership met to discuss the Agency's position with respect to inverse floaters."

By then, however, Freddie had long since stopped selling floating rate securities — not because of any order from FHFA but because the market for them dried up in spring 2011 when Federal Reserve chairman Ben Bernanke indicated that interest rates would remain low for at least another year.

That's not how FHFA described what happened after our story broke. In a statement released in response to ProPublica and NPR's reports, the agency said that staff met with Freddie in December 2011 and came to an agreement then to suspend inverse floater trades. The inspector general's report concludes that statement was misleading: "prior to January 2012, neither Freddie Mac nor FHFA made a decision to halt Freddie Mac's creation and investment in inverse floaters; the market for reciprocal floating rate bonds simply disappeared. Had the market reappeared and Freddie Mac found the economics were again profitable, [Freddie] would have been free to structure floating-rate and inverse floating-rate investments."

In a response to the report, the FHFA disputed the inspector general's reading of the public statement, saying that it did not claim "that there was a specific, well-articulated FHFA policy and agreement" in December. The agency also emphasized that it did not take a position on inverse floaters only in reaction to media reports. While acknowledging that "the key stakeholders" had met together for the first time on January 30th, the day ProPublica and NPR released their original stories, the FHFA emphasizes that it had been in communication with Freddie on inverse floaters over the previous year.

The inspector general's report was requested by Senator Robert Menendez, D-NJ, last January, after our story brought the issue to light.

 

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