Explaining Southern California's economy

Freddie Mac scandal: It goes on and on...

While Sales Of Existing Homes Rise In July, Prices Continue To Fall

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A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.

Jesse Eisinger and a ProPublic co-author, Cora Currier, along with NPR's Chris Arnold, have followed up on their original story about Freddie Mac allegedly betting against homeowners being able to refinance their mortgages. To summarize without getting too deep into risk-mitigation instruments and complex financial jargon, Freddie was using these things called "inverse floaters," and more or them than Eisinger originally reported ($5 billion), to...well, what exactly? Eisinger argues that they were being used to bet against homeowners refinancing out of high interest rate mortgages — a neat trick, given that Freddie could set the refinancing rules.

Some bloggers, myself included, have asked whether this really what was going on. Eisinger posted a lengthy comment on my blog and also Felix Salmon's blog at Reuters, helpfully addressing many of the issues that the debate over the story has raised. Felix fires up his analogy-o-matic and provides a good, simple explanation of what Freddie was up to (it involves, cleverly, a real-estate hook). Ultimately, he agrees with Eisinger:

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