(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.
Whichever member of the President's team is advising him on this deserves a medal. This is the first economic policy idea he has had that isn't backwards. If his goal is to move to a system with one GSE supporting mortgages for lower-income homeowners, there is at least potential for improvement as long as both parties resist the urge to use it to hand out deals to their own voteing base at taxpayer expense.
The ultimate goal needs to be getting the government, and by extension the taxpayer, out of the line of responsibility for private borrowing and this seems to be at least a step in the right direction. Don't reject it because you may be a member of the other party and especially because it is not a perfect plan. Perfect is the nemesis of good.
Should also phase out welfare programs by changing them into work programs.
In early 2007, then Senator Obama wrote a letter to Treasury Secretary Paulson and Federal Reserve Chairman Bernanke expressing concern about the subprime mortgage market and predicting the possibility of a major meltdown. He was actually spot on in his assessment of the market at that point, which I think gives his endorsement of the bipartisan Corker/Warner Senate bill a decent amount of credibility. Of course, just because a bill makes sense, there's no guarantee it will make it through the House.
Sounds like we are rebranding Fannie and Freddie, not getting rid of them. Why not simply eliminate them?
There is no reason why a principal reduction is necessary for home buyer relief. As long as refinancing is allowed to lower the interest rate, homeowners will be helped to an extent and the banks and subsequently taxpayers would not have to pay such a burden. Responsible home ownership should require that re-financing doesn't permit homeowners to cash out and grow the debt on the first property. Make that rule modification and you will see the end of exotic loans and rampant speculation by banks and investors. And furthermore it will keep people in their homes although it will prevent them from using equity in first home to speculate on a second property. As restrictive as this regulation might sound, it will restore fundamentals in the property market quicker than any other measure.
Hey Bwana; it was your buddies that were running the Freddie-Fannie show. Remember a donko by the name of Barney Frank?
I'm not a liberal either, and I completely agree with this too.
Trouble is, Obama is leaving out the small detail that government-mandated reduction in underwriting criteria led to the explosion of sub-prime lending, forcing the GSEs to take on a larger share of the burden. The pessimists among us might suggest that elimination of Fannie and Freddie is the first step toward greater governmental control of private lending institutions.
Those mortgages were bundled up into securities and then sold to the Chinese. What are you going to tell them?
By calling for such a plan, did the president realize that his comments would make the market react and share holders of Freddie and Fannie take a major loss.
private capital has to actually be available to maintain a liquid market. most of you have no clue about the fact that it was as much greedy consumers as it was the banks responsible for the bailout. The biggest culprit was the media as they created a nightmare run on the banks and investors shorted bank stocks like never before. the secondary mortgage market needs more fannie and freddies under a private structure – transfering them to private firms while allowing new similar firms to get in the market is the only way to make it work. If fannie and freddie go away you lose 20,000 professionals who worked to maintain liquidity and balance in the mortgage market. Try to make it completely private and subprime will return – and we will end up right back where we were. Risky mortgage products are what enticed so many private firms- now with standard , lower risk products there is less interest.
Risk transfer like stacr along with making fannie and freddie smaller with more competition will allow the ability to maintain liquidity, protect homeowners from large banks who care nothing about how loans are serviced and reduce taxpayer exposure. Those saying send fannie and freddie to their graves are clueless and should be careful what you wish for-
Phase out this, plus every other Bolshevik program in the US government, like Dept of ReEducation, Dept of InJustice, fat retirement plans, HHS, cancel these things.
The American People can have it one of two ways.
1. Lower interest rates by keeping Fannie / Freddie a float with risk of potential tax payer bailouts in the future.
2. Higher interest rates shutting down Fannie/Freddie by taking away the safety nets and making home ownership harder to reach for the next generation.
5%, 10% 20% down payments on home purchases will be a thing of the past. Likely private lenders will require 30 to 50% down since they are taking on all of the risk. The 30 year fixed loan will also be a thing of the past. 5 to 10 year ARMS will become the new normal like in Australia.
Not for or against this idea but just sharing what I've learned in my 15 years of mortgage lending.
Today the O gave segments of the identical speeches he gave during his 2008 campaign speeches. About the only difference was the 2.3 million new jobs he was claiming responsibility for but neglecting to mention that 2 million of them were part time. I hope others recognized this.
Everyone sick of the spotas?
"Still socialistic. As long as there is a safety net, there is no risk, and other taxpayers are still on the hook."
Save the extremist t-bagger nonsense. Chances are you didn't buy your house(if you live in one) flat-out with cash up front, paid in full. If you went to college within the last 30 years, you probably got a loan for that too. Same goes for your car and all sorts of other things. All those loans, credit cards, and similar things you RELY on didn't grow on trees. It came from taxpayers, the customers of your bank(or whichever bank your bank borrows from), and other sources.
There will ALWAYS be a "safety net" of one kind or other, especially in a country that relies so heavily on outsourcing and credit. The fact that Repubs have managed to sell these fantasies about getting rid of safety nets using jobs in CONGRESS(where people get the job by relying on donated HANDOUTS, and keep their jobs by using gerrymandering and other tactics to create a safety net of their own), is what makes it all so laughable.
Its just more gutting of America.
Wait, he wants to let the private sector handle mortgages but take health care from the private sector?
Didn't Bush try to do this but couldn't get the democrats on board? Why YES he did. I just googled it. Didn't Obama say the Fannie & Freddie were "essential" for people to fulfill the "American Dream?" Why TES he did. I just googled it. So I guess the DemLibSocProgs will say King B Hussein has "evolved" instead of saying he "flip-flopped" and is following the policies of GW Bush. Oh and I bet they don't get Bush any credit for this either.
Didn't Bush try to do this but couldn't get the democrats on board? Why YES he did. I just googled it. Didn't Obama say the Fannie & Freddie were "essential" for people to fulfill the "American Dream?" Why YES he did. I just googled it. So I guess the DemLibSocProgs will say King B Hussein has "evolved" instead of saying he "flip-flopped" and is following the policies of GW Bush. Oh and I bet they don't give Bush any credit for this idea either.
Finally. Dismantling a gov't controlled entity. Can a few bureaucracies follow? Not many. Just the redundant.
Of course when President Bush said the same thing, it was racist.
Can we phase out Obama
Good proposal from Obama but wait till it gets to the house. It will be opposed unconditionally by the house GOP because it came from Obama.
Duhh. About time. Now, if the politicians can just restrain themselves from encouraging another housing bubble with mortgages to borrowers who can't pay them, the taxpayers can stop having to bail things out.