(CNN) – With the housing bust's epicenter as his backdrop, President Barack Obama called Tuesday for a full revamp of the government's involvement in home mortgages, including endorsing a full wind-down of loan giants Fannie Mae and Freddie Mac.
The 2008 government bailout of Fannie and Freddie amounted to one of the most expensive government rescues of the financial crisis, costing billions – a tab the president argued Tuesday should never again be left to taxpayers.
"For too long, these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was 'heads we win, tails you lose.' And it was wrong," Obama said.
Fannie and Freddie - known together as the GSE's, or Government Sponsored Enterprises - sustained massive losses as the housing market went bust, requiring taxpayer bailouts that swelled to more than $187 billion. The companies have since paid the Treasury Department nearly $60 billion in dividends as they've returned to profitability, but it's unclear when they'll be completely free of their obligations and how they'll be managed in the future.
The two firms - which don't directly issue mortgages, but rather buy loans from other lenders and repackage them for investors – have a hand in more than half of current U.S. mortgages.
Back in 2006, just 30% of new mortgages were backed by the government, according to Inside Mortgage Finance. But as the housing sector cratered, private capital fled the market and the government's role expanded. In 2012, more than 86% of new mortgages had government backing.
On Tuesday, Obama called for more private backing of mortgages – a notion the president joked "sounds confusing to the folks who call me a socialist." He argued the government should only assume responsibility for mortgages as a last resort, and that bailouts for firms who were overly risky in their lending practices were a thing of the past.
"We can't leave taxpayers on the hook for irresponsibility or bad decisions by these lenders or Fannie Mae and Freddie Mac," he said. "We've got to encourage the pursuit of profit – but the era of expecting a bailout after you pursue your profit and you don't manage your risk well - it puts the whole country at risk. We're ending those days. We're not going to do that anymore."
A Senate plan, introduced in June by Republican Bob Corker and Democrat Mark Warner, would eliminate Fannie and Freddie and replace them with a new agency insuring mortgage-backed securities. Obama said Tuesday he supported those efforts.
He also called for a return to the 30-year fixed rate mortgage, considered a safe bet for homeowners compared to more exotic loans employed before the housing crisis.
His remarks in Phoenix marked a return to the city for Obama, who trekked there in 2009 to offer up a housing plan amid a nationwide plummet in home prices. Phoenix was one of the country's hardest-hit municipalities - residents saw the price of homes slashed by more than half and the foreclosure rate skyrocketed.
The past several years have seen an increase in home prices in Phoenix, though they still are well below their 2006 pre-crash high.
Obama's administration has tried to help underwater borrowers – those who owe more than their homes are worth – through the Home Affordable Modification Program, or HAMP.
But that initiative has been limited in its effectiveness over the past few years, securing principal reductions for less than 120,000 borrowers as of the end of 2012, and it limits such reductions to mortgages that aren't controlled by mortgage financing giants Fannie and Freddie. Obama Tuesday called on Congress to allow all homeowners the opportunity to refinance at current rates.
The stop in Phoenix Tuesday is the latest in a series of trips the president has made over the last two weeks to advance his economic agenda. At an event in Tennessee last week, Obama called for a new "grand bargain" that would revamp the corporate tax code while investing in job creation initiatives.
He was greeted at the airport by Arizona's Republican Gov. Jan Brewer, who angrily shook her finger at Obama at the start of a 2012 presidential stop in her state.
Her greeting this time around was more cordial, and the governor's office said Brewer planned to ask the president to allocate federal disaster funds to the area affected by the Yarnell Hill fire, where 19 firefighters perished on a single day in June.
CNNMoney's James O'Toole contributed to this report.
Since the GOP liked this idea before and now Obama does, anyone want to bet how long it takes the House to be against it?
More empty promises. Sounds good? How praytell? Replacing FMx2 with "a new agency insuring mortgage-backed securities" its the SAME thing people. If the gov't is "insuring" it, then the taxpayer will still be on the hook. Just kicking the can IMHO.
Wow! Replace Freddie/Fannie with another agency! If Government had not forced Freddie/Fannie to issue loans to people who could not afford even 3.6% payments these agencies would not lose so much money. Even after the collapse, their loss would be much lower if Government had not forced them to buy 80% of the mortgages issued since 2008. Obama is trying to find a way where Private Capital (Our 401K, Pension/Retirement Funds, Roth IRAs, Mutual Funds etc.) takes all the risk and Government can still help people into houses they can't afford!
Great idea, but the result will be higher rates and lower home prices. Good for some, not good for most others. These agencies create liquidity – in other words a large supply which lower rates. Without them rates will rise substantially and home prices will drop. If your not underwater and plan to keep your home, you're in good shape. If you need to sell in the future, you will not like the result!
I also agree with the President. It is an excellent idea.
Fannie and Freddie have paid over $130B, not $60B CNN.
The U.S. could make money by letting the GSE's recapitalize and then cashing out the preferred shares they own. With a smaller system mortgage rates will be higher in the long term, burdening the taxpayer with a the opportunity cost of the lost chance at lower mortgage rates and thus higher affordability conditions. No bank wants to loan their money to an individual for 30 years at 4% - it's just too risky.
The whole mess started with Clinton saying everyone was " entitled" to home ownership. Lenders were pressured to make loans to irresponsible buyers. Fannie and Freddie were made to clean up the mess.
Loans should require a down payment of at least 5% and 10% if there's anything less than perfect credit. If the buyer doesn't have the discipline to save for a down payment, he won't budget for upkeep or keep a savings for emergency situations. Home ownership is for the responsible.
I hope he has a plan for the GSE's part in multi family financing. Apartments were never the problem and in fact are very profitable for both Fannie and Freddie, even when housing was killing them. If he takes GSE financing away from apartment owners he will create another massive problem...NMHC is likely all over this issue...
NOW the left wants to phase out Freddie and Fannie? They fought hard to protect Fannie and Freddie before and even after the housing bubble collapsed.
this guy knows nothing about everything. go away on vacation already and stay there!!!!
"A Senate plan, introduced in June by Republican Bob Corker and Democrat Mark Warner, would eliminate Fannie and Freddie and replace them with a new agency insuring mortgage-backed securities. Obama said Tuesday he supported those efforts."
But of course, it's just another safety net. This is nothing more than a bait and switch plan – the Fed govt gets to pocket all the profits that Fannie and Freddie are currently producing, phase them out for another program (all the while giving the shaft to debt holders). The new program leaves the govt on the hook for mortgages – just smoke and mirrors here folks, move along.
Lets stick it to the millions of shareholders. They can write off a tiny bit on their taxes. Then the government can make all the money to support stupid wasteful programs.
We of the GOT have absolutely no plan on this one, but promise to represent the American People's Interests by blocking all his initiatives, good and bad.
I agree with Obama also...and Jan Brewer....well she had a disaster. Now she is happy to see the president.
On board, as long as borrowers also assume full responsibity for their debts. No more "strategic defaults". No more blaming/suing the Bank because the value of your house goes down. You either pay of if you can no longer pay (for whatever reason including layoff, illness, whatever) you accept foreclosure or declare bankruptcy. If it destroys you credit so be it. If it means you can't afford to own a house, so be it. No more free lunch. No more bailouts (individual or corporate).
They have millions of shareholders that have been waiting for a return to profitability. Pension plans caught holding the bag. They are making money again, What is wrong with letting them pay the money back and going on with their business? Just like the auto industry and others who received a bailout? The government just realizes what a cash cow it is and wants it to support their stupid policies.
I am glad Obama is adopting the long time position of Republicans on this issue. He is exactly correct. Now.
There's nothing free-market driven about the private federal reserve pumping money into big banks for mortgage loans.
Obama is starting to play "trick you if I can" these days.
GSE's, or Government Sponsored Enterprises. Hmm, not at all unlike China's SOE's (State Owned Enterprises)
pass harp 3.0! I have been current on my mortgage and I AM underwater. But because my loan isn't backed by freddie and fannie i can't get any sort of loan modification or better interest rates? I will spend more in the economy if I pay less in my mortgage! DUH!
I agree with Obama here. I have been saying Fannie and Freddie had a role to play in this for a LOOOOOONG time.
The government will only step in when an emergency happens??? is that not what happened? Is this not a plan to bail out the system again when need be? Those of you who are saying this looks like a good idea, all that pressure will be put on the private sector and the banks will fall twice as hard next time. This is a witch hunt and I feel like there is other motives behind this.
so now he's AGAINST socialism??? i'm having a hard time keeping up. his flip-flopping is sounding more and more like romney's every day.
Gov. Brewer is changing her tone now that she needs federal assistance. Typical politician
Maybe if the government hadn't started demanding banks start loaning money to people that were not qualified under the long-standing terms of home loans (20% down, 3x your yearly salary max, income to debt ratio requirements, etc)... then I might have some sympathy.
However, since the government DID make lowering those terms a requirement, I have little sympathy except for the fact that ALL of us are going to be paying it back.
If the terms aren't illegal, the government needs to stay out of the business of telling banks to take more risk on their loans. This is the perfect example of why.