President Barack Obama on Tuesday proposed a broad overhaul of the U.S. mortgage finance system, including winding down government-backed mortgage giants Fannie Mae and Freddie Mac. He declared that taxpayers should never again be left “holding the bag” for the mortgage giants’ bad bets.
The president wants to replace Fannie and Freddie with a system that would put the private sector, not the government, primarily at risk for loans. The government would still be involved, both in oversight and as a last-resort loan guarantor.
Obama outlined his proposals in Phoenix, the once foreclosure-riddled desert city at the epicentre of the U.S. housing crisis. The housing market in Phoenix, as well as in many other parts of the country, has rebounded robustly, with prices in the south-western city up 66 percent from the low point in 2011.
Despite the nationwide gains, the president said sweeping housing reforms are still needed to ensure that a rejuvenated market doesn’t simply “re-inflate the housing bubble.” The cornerstone of that effort is winding down Fannie Mae and Freddie Mac, a proposal with bipartisan support in the Senate.
“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,” Obama told a crowd of more than 2,000 at an area high school. He spoke following a tour of a construction company that has been able to hire hundreds of new workers as a result of the region’s housing comeback.
While the president has previously endorsed overhauling Fannie and Freddie, his remarks Tuesday marked the first time he outlined his specific priorities for doing so.
Obama is also seeking guarantees that a private sector-led mortgage finance system would still ensure wide homeowner access to popular 30-year mortgages at fixed rates.
Making light of criticism from Republicans who have cast him as a big-spending liberal, Mr. Obama joked that his calls for deeper private sector involvement “must sound confusing to the folks who call me a socialist.”
Once flourishing, Fannie and Freddie were bailed out in 2008 by a $187 billion taxpayer-backed bailout. The two enterprises don’t make loans directly, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. The enterprises currently own or guarantee half of all U.S. mortgages and back nearly 90 percent of new ones.
Mr. Obama’s trip to Phoenix marked the latest stop on a summertime tour aimed at rallying the public around his economic policies ahead of looming budget fights with congressional Republicans this fall. It was also a return to the city he visited just weeks after taking office in 2009 to tout the government’s role in bolstering the housing market.
The nationwide housing recovery has been providing critical support to the economy at a time when manufacturing and business investment have stagnated. Steady job growth and low mortgage rates in the past year have also fuelled more home sales. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher and encouraged builders to start more homes and create more construction jobs.