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Grant: End Freddie Mac Policies Against the Private Market

The recent revelation that Freddie Mac’s business unit has bet billions that home loan modifications would fail is shocking even to the most devout critics of the failed, taxpayer-funded entity. The transactions, known as “inverse floaters,” are not illegal. But rigging the housing market to ensure the investments deliver a profit might be.

In addition to being a bet against homeowners and the Obama administration’s litany of struggling programs designed to save homeowners and Freddie, the inverse floaters are a bet against the private housing market. The bets fail not only if loan modifications work, but also if private buyers purchase Freddie’s inventory of distressed property. And here’s where Freddie has a problem.

For more than a year, Freddie Mac has adopted numerous policies designed to prevent the private purchase of toxic assets and forced servicers to enforce these policies. Demands for unreasonable offers on short sales, delays in processing short sales, affidavits preventing resale of their properties after being rehabbed and deed restrictions on real-estate-owned properties restricting resale price are among the myriad obstacles private buyers face in trying to buy Freddie’s inventory.

Besides delaying the unwinding of the troubled entity, several of these policies may in fact be illegal. Restricting the ability of private buyers to resell their properties and attempting to dictate resale value constitute unreasonable restraint on alienation. In plain English, once Freddie sells one of its toxic assets, it has no standing in future transactions related to the property.

Freddie has attempted to justify these policies through a taxpayer-funded media campaign arguing that the act of buying, rehabbing and reselling a property constitutes a crime and is inherently an act of fraud. Both Freddie and Fannie Mae have worked with enforcement officials to convince them of this lie. To the embarrassment of these enforcement officials, Freddie left out one important detail: Every time it stopped a short sale, Freddie made money.

Congress has known of Freddie’s anti-private-market agenda and done nothing to challenge it.

Homebuyers who take the risk to buy Freddie’s toxic inventory and turn its mistakes into quality homes deserve better. These entrepreneurs are the job creators; their sweat rebuilds struggling communities, generates local and state tax revenues and increases home prices in the areas most affected by the housing crash. For their contributions, they have been criminalized by an entity that has lost and continues to lose billions of taxpayer dollars and has essentially made a bet against a housing recovery.

The inverse floater transactions are the smoking gun evidence of what is really going on inside Freddie Mac. Freddie’s policies toward purchasers of its distressed assets have been nothing more than a business decision cloaked in feigned and false concerns over fraud and taxpayer interests. Their multibillion-dollar bet makes that crystal clear.

Since placement in conservatorship, Freddie Mac has made fools of many: enforcement officials on a snipe hunt for “fraud” perpetrated by people who are simply rebuilding our communities; the Obama administration, which rolled out program after program while all along Freddie bet against those programs; Congress, which surrendered its oversight to the Federal Housing Finance Agency; and the FHFA, which believes a new program designed to sell Freddie’s assets to hedge fund managers will actually bring in more revenue than selling to local investors.

But most of all, Freddie has made fools of American homeowners.

Anyone who works in finance knows that the real test for what an investor thinks, what an investor believes, is found by watching where that investor puts its money. Freddie Mac’s policies have denied distressed homeowners the right to vacate their homes without a foreclosure. And its investment vehicle has found a way to profit from the misfortune of others.

Solutions to this are simple, but they take political courage.

Congress and the Obama administration must work together to end all the anti-private-market policies in place at Freddie. This will allow for an orderly, organic and fair unwinding of the failed institution.

To the extent that government programs are working, keep them in place to help homeowners. But let there be no doubt that recovery and rebuilding American communities means private investment and local boots on the ground. That is a prescription for recovery no one should bet against.

John Grant represents the Distressed Property Coalition, a group of private residential real estate investors in Washington, D.C.

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