How Taxpayers Subsidize Freddie Mac

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By JOE LIGHT

Because of a relatively obscure quirk in the mortgage market, taxpayers in effect subsidize Freddie Mac FMCC +0.00% to the tune of $400 million to $600 million annually, according to an Urban Institute report released Wednesday.

Freddie Mac, along with competitor Fannie Mae FNMA +0.85%, plays a central role in the bond market by backing and issuing securities whose payments are drawn from homeowners paying off their mortgages.

Freddie and Fannie’s securities trade separately. However, their regulator, the Federal Housing Finance Agency, in August unveiled a plan to combine them and opened a 60-day comment period on the proposal. Unlike broader housing-finance reform, which so far hasn’t received enough congressional support to move forward, the proposed single security could happen without legislation, the FHFA says.

The issue is extremely important to bond investors, who trade the securities, and somewhat important to borrowers, whose rates could be affected by changes in the mortgage-backed securities market. The change could also mean the end to a long-held competitive disadvantage held by Freddie Mac, which the report says has resulted in hundreds of millions of dollars being lost annually by taxpayers.

The report was co-authored by Laurie Goodman, director of the Housing Finance Policy Center at Urban, and Lewis Ranieri, who is chairman of Ranieri Partners and co-inventor of the mortgage-backed security.

Here’s what’s going on and why it matters.

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