WASHINGTON—A federal watchdog said Tuesday it would examine Freddie Mac's use of a mortgage derivative amid allegations that such investments gave the mortgage company an incentive to prevent borrowers from refinancing their home loans.
The inquiry comes amid an outcry on Capitol Hill after ProPublica, a nonprofit investigative news outlet, and NPR News reported this week that Freddie Mac, a government-controlled mortgage-finance company, had a conflict of interest that caused it to discourage homeowners from refinancing their mortgages.
Freddie Mac, which has been controlled by the government for more than three years, denies that its investments in mortgage derivatives affected its refinancing policies.
A spokeswoman for the inspector general that oversees Freddie Mac's regulator, the Federal Housing Finance Agency, said Tuesday the inspector general has an "open evaluation" on issues including those derivatives investments. "We'll know more when the evaluation is completed," she said.
The inquiry comes amid concerns on Capitol Hill about Freddie Mac's investment in "inverse floaters," a derivative that invests in a certain piece of the cash flow in a mortgage-backed security. These investments would be worth less if borrowers refinanced and lowered their interest payments.