Why Freddie Mac Should Slow Down

SMITH BRAIN TRSUT -- Smith Executive-in Residence and Professor of the Practice Cliff Rossi has raised concerns as mortgage underwriting giant Freddie Mac recruits traders from the likes of Citi, Bank of America and Credit Suisse to place new housing wagers. Bloomberg Business, in an article published today, says these "Wall Street refugees" are bundling mortgages into new Freddie-guaranteed securities.

Rossi told Bloomberg in December that Freddie's bond-trading push to support the housing market contradicts post-financial crisis policy to unwind their investment books to mitigate a repeat of 2008. “They need to be unwinding the portfolios as soon as they can," Rossi said. "To get an organization staffed up for the purposes of ongoing trading activity runs counter to the intent. I have a real problem with that.”

Bloomberg reports that Freddie is packaging the new bonds into collateralized mortgage obligations with various levels of risk and cherry picking the parts it wants. But with the 2008 subprime lending crisis placing Freddie and Fannie Mae under federal conservatorship, the move is scrutinized for placing taxpayers at stake. Money goes to the taxpayers if things work out. But, according to Bloomberg, “if the new traders make a mistake or markets move in surprising ways, ultimately, that risk is held by the taxpayers.”

Rossi, who held senior risk management positions at Freddie and Fannie, will testify on Feb. 26 about Federal Housing Administration oversight before the U.S. House Committee on Financial Services. He recently authored A Risk Professional’s Survival Guide and wrote Why the Obama administration should revive Fannie and Freddie on its own for The Hill.