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Obama Outlines Plans for Fannie Mae and Freddie Mac Obama Outlines Plans for Fannie Mae and Freddie Mac
(about 3 hours later)
WASHINGTON — In another sign that the housing market has strengthened, President Obama on Tuesday outlined his long-awaited ideas for overhauling the mortgage finance giants Fannie Mae and Freddie Mac to significantly reduce the government’s risk in any future credit crisis. PHOENIX — President Obama hailed both this city’s and the country’s comeback from the housing bust on Tuesday, and said it was now time to reduce the federal role and risk in the mortgage market “to make sure the kind of crisis we went through never happens again.”
In an appearance in Phoenix, Mr. Obama endorsed bipartisan efforts in the Senate to wind down the two companies and end their longtime implicit guarantee of a federal government bailout. That dread prospect, once thought improbable, was realized in the fall 2008 financial crisis; Fannie Mae and Freddie Mac, then bankrupt, were rescued by the government at great cost to taxpayers, who only now are being repaid. He proposed to “wind down” Fannie Mae and Freddie Mac, for the first time outlining his approach to overhauling the two giant mortgage-finance companies that were taken over by the government when they failed nearly five years ago. The companies, which Mr. Obama described in an appearance here as “not really government, but not really private sector,” recently began to repay taxpayers.
The president made clear that he will only sign into law a measure that puts private investors primarily at risk for the two companies, which buy and guarantee many mortgages from banks to provide a continuing stream of money for lenders to provide to additional home buyers. “For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” the president said. “It was ‘heads we win, tails you lose.’ ”
An acceptable measure also must specify the government’s role and liabilities for Fannie Mae and Freddie Mac, and — unlike legislation in the Republican-controlled House — must ensure Americans’ continued access to a 30-year mortgage at a fixed interest rate. Since early 2011, the administration has voiced support for overhauling Fannie Mae and Freddie Mac, which long benefited from an implicit government guarantee. Years ago the companies came to symbolize a self-dealing Washington culture beneficial to both parties, and especially Democrats, but Mr. Obama’s remarks on what comes next were his most specific. For several years, the administration held back from revamping the mortgage-finance system for fear of rattling a weakened market.
House Republicans would let the market determine whether to provide the long-standard mortgages, but the White House and the bipartisan Senate groups say that would make a 30-year, fixed-rate mortgage harder to get and more costly. Mr. Obama on Tuesday endorsed the thrust of bipartisan legislation from a Senate group that would “end Fannie and Freddie as we know them.” The so-called government-sponsored enterprises for decades bought and sold mortgages from financial institutions to provide money for the banks to keep lending to home buyers.
After years in which the formerly formidable Fannie Mae and Freddie Mac and their Congressional allies blocked proposals for payment of fees or risk premiums, Mr. Obama is calling for financial institutions to pay an assessment to the government on the value of mortgage-backed securities. Under his proposals, the revenue would help finance assistance for borrowers and subsidize construction of homes and rental properties that would be affordable to lower-income Americans. Under Mr. Obama’s principles, which he said were reflected in the Senate bill taking shape, Fannie Mae and Freddie Mac would further shrink their portfolios and lose the implicit guarantee of a federal government bailout. Instead, private investors would be most at risk, with the government a secondary guarantor.
Since his first year in office, Mr. Obama has been under pressure to propose legislation to remake or break up Fannie Mae and Freddie Mac, but the administration delayed those efforts while the housing market remained weak. By his advocacy now, aides say, Mr. Obama is putting his thumb on the scale for bipartisan efforts in the Senate Banking Committee over the legislation taking shape in the House that he does not support. “First, private capital should take a bigger role in the mortgage markets. I know that sounds confusing to folks who call me a socialist,” Mr. Obama said, drawing laughs and applause. “I believe that our housing system should operate where there’s a limited government role,” he added, “and private lending should be the backbone of the housing market.”
“The current housing finance system, where the government guarantees more than 80 percent of all mortgages through Fannie Mae and Freddie Mac and F.H.A., is unsustainable,” said a senior administration official, who declined to be identified speaking in advance of the president’s appearance. The president said that any measure he signed into law “should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage.”
In choosing Phoenix, Mr. Obama returned to a city that has come to symbolize for him the depths of the housing bust and now its apparent recovery. Weeks after taking office in 2009, Mr. Obama went to Phoenix to offer initial housing proposals for addressing “a crisis unlike we’ve ever known,” one “that strikes at the heart of the middle class.” More than four years later, in Phoenix as in much of the country, home sales and values are up sharply from their nadir, and foreclosures are down. “That’s something families should be able to rely on when they’re making the most important purchase of their lives,” he said.
“We’re returning both because there has been significant progress in rebuilding the housing market in Phoenix and around the country more broadly, but also because there remains more work to do,” said a second senior administration official who also would only speak on grounds of anonymity. Senator Mark Warner, Democrat of Virginia who is part of the bipartisan effort on the Senate banking committee, welcomed the president’s endorsement. “It’s good to see additional momentum,” he said in a statement.
The Obama administration’s initial housing measures did not achieve nearly the results predicted in the early years, in part because of financial institutions’ refusal or slowness to modify troubled mortgages. Several times the housing programs were modified, but even some supporters say Mr. Obama still has not done enough to relieve Americans who lost their homes as values plummeted or who kept their residences but owe more on their mortgages than their homes are worth. Republicans, however, have opposed what they consider government bailouts. Brian Gardner, a senior vice president in Washington at Keefe, Bruyette & Woods, wrote to clients that Mr. Obama’s address on mortgage finance was “important because the administration has not discussed it in some time.” Despite the presidential push, he said, Congress is not likely to approve a bill before 2015.
Nonetheless, Mr. Obama once again called on Congress to approve measures he proposed in 2012 to allow more homeowners who are underwater – those who owe more than their houses are worth – to be able to refinance while mortgage interest rates remain relatively low, including homeowners who do not have mortgages backed by Fannie Mae, Freddie Mac or the Federal Housing Administration. And he will draw attention to existing programs that have helped Phoenix and other places hard-hit by the housing crisis. Separate legislation in the Republican-controlled House would remove the government from the mortgage market, including from the decision whether to keep providing the 30-year mortgage. But Mr. Gardner wrote that even “many free market proponents acknowledge that the government will play some backstop role in a future system” and be compensated for it.
While Mr. Obama mainly is addressing homeownership, he also promoted affordable rental housing more than in the past. That reflects a broader shift in thinking after years in which the government promoted the so-called American dream of homeownership. After years in which the formerly formidable Fannie Mae and Freddie Mac and their Congressional allies blocked proposals requiring some kind of fees or risk premiums, Mr. Obama is calling for an assessment to be paid to the government on the value of mortgage-backed securities.
For some analysts, the crisis suggested that many Americans could not bear the burdens of homeownership, but were pushed by banks and government policies into mortgages. Advocates of affordable housing have called for a “rebalance” of government efforts, which they say have too long been skewed toward homeownership. Under his proposals, the revenue from an assessment would help finance aid for borrowers and the construction of houses and rental properties that lower-income Americans could afford.
“It’s refreshing to see the president acknowledge the importance of rental housing policy, too,” said Douglas Rice, an analyst at the left-leaning Center on Budget and Policy Priorities. While more than one-third of American households are renters, he said, three-quarters of federal housing assistance benefits homeowners, especially through tax breaks, and more than half of the benefits go to households with incomes above $100,000. Mr. Obama’s focus was homeownership. But he emphasized the need for more affordable rental housing more than he had before. Advocates have called for a “rebalance” of government subsidies, which they say have too long been skewed toward homeownership and mostly benefit the affluent.
“In the run-up to the crisis, banks and the government too often made everyone feel like they had to own a home, even if they weren’t ready and didn’t have the payment,” Mr. Obama said. “That’s a mistake we shouldn’t repeat,” he said. “Instead, let’s invest in affordable rental housing.”
Mr. Obama purposely spoke in Phoenix, where weeks after taking office he first announced his ideas for providing relief to homeowners and stemming foreclosures. Here, as in much of the nation, home values and sales are up, and foreclosures are down. Before arriving at a high school gym packed with an enthusiastic crowd, he visited a housing construction company that has quintupled its work force since the bust.
But as he often does, Mr. Obama tempered his celebration of better times, and his administration’s role in helping to reach them, with acknowledgment that the recovery was not complete.
“The truth is, it’s been a long, slow process,” he conceded. “But during that time we’ve helped millions of Americans save an average of $3,000 each year by refinancing at lower rates. We’ve helped millions of responsible homeowners stay in their homes, which was good for their neighbors because you don’t want a bunch of foreclosure signs in your neighborhood.”