August 6th, 2013
04:40 PM ET
12 months ago

Obama calls for phase-out of mortgage giants Fannie and Freddie

(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.


Filed under: Arizona • Economy • President Obama
soundoff (193 Responses)
  1. Wildcatforlife

    I agree that these agencies need to be abolished. But most of you, including Obama, are ignorant as to what this will do to the market. It will raise the rates significantly and force more people into adjustable rate mortgages. But being a banker, this is good news for me.

    August 6, 2013 09:48 pm at 9:48 pm |
  2. KG

    What Obama fails to mention is that the Democrats were the ones pushing Fannie and Freddy to make all the bad loans. Pelosi and her peers in the Black Caucus were at the heart of it while Republicans pushed for greater restrictions. I do agree that phasing them out while streamlining corporate tax codes are good ideas.

    August 6, 2013 09:51 pm at 9:51 pm |
  3. john west

    I agree completely.

    August 6, 2013 10:05 pm at 10:05 pm |
  4. HenryMiller

    Fannie Mae and Freddie Mac should never have been created in the first place, but it's never too late to get rid of them. And they should certainly not be replaced by anything even remotely connected to government. We all know what happens when government with our money.

    August 6, 2013 10:24 pm at 10:24 pm |
  5. greatwhitehope

    Of all the stupid double talk ever produced in Washington, this is the sprinkles on top of the icing on top of the cake. Does he ever listen to the crap tha spews from his mouth?????

    August 6, 2013 10:24 pm at 10:24 pm |
  6. independent non-idiot

    Uh, yeah, but isn't phasing out Fannie and Freddie far more conservative than what any recent president has proposed on the matter? It's simply idiotic to imply that leaving in anything at all is super-liberal and socialism, at least more socialist than the average person, left or right, would be. (actually, implying that welfare in general is socialism is laughable)

    August 6, 2013 10:24 pm at 10:24 pm |
  7. us_1776

    This proposal is worst of all worlds for the taxpayer.
    Private corporate profits
    w/all risk guaranteed by the taxpayer.

    NO THANKS!

    .

    August 6, 2013 10:26 pm at 10:26 pm |
  8. coastlinecascot

    At first I agree with Obama. Until it stated its going from two agencies to one. So whats going to change? the answer nothing.

    August 6, 2013 10:27 pm at 10:27 pm |
  9. Barry

    The mortgage industry was wrecked by the democrat congress requiring them to loan money to deadbeat lying democrat brokes who never had any intention of repaying the money.

    August 6, 2013 10:29 pm at 10:29 pm |
  10. jerry

    @ W.C.
    The difference is that the phase in will be biased towards private ownership rather than government ownership. You seemed to miss the entire point of this speech and article, talk about hot air.

    August 6, 2013 10:37 pm at 10:37 pm |
  11. DMG2FUN

    Hey leftist aka progressive socialist putz prez bo. High school students cannot vote!

    August 6, 2013 10:42 pm at 10:42 pm |
  12. Rocinante

    President Obama is channeling President Reagan. Good for hime

    August 6, 2013 10:45 pm at 10:45 pm |
  13. Fiscal2020

    @W.C Quantrill Wrong. Deposit insurance is the cornerstone of modern free market banking and that is a safety net.

    You seem to have confused libertarianism with conservatism. A safety net is not automatically socialism.

    August 6, 2013 10:50 pm at 10:50 pm |
  14. bk

    Ok. And replace them with what? The majority of people who own homes today, and in the past, would never have gotten the opportunity without FNMA or FHLMC. This political bs displays a complete and utter lack of knowledge of how the mortgage originations in the USA operate. First of all, FNMA and FHLMC had almost NOTHING to do with the housing meltdown. That was the subprime market which went up in a puff of smoke when people came to their senses. The fact that people are under water has NOTHING to do with FNMA or FHLMC. Most of the loans they did were sound. Values went down....but NOT because of FNMA and FHLMC.
    Go ahead and pull the plug on FNMA and FHLMC. And watch the ability for everyday people to purchase a home disappear. So called "private" investors don't want to tie up their money for 30 years at a fixed rate. The mortgage market will dry up and make what we just went though look like a cakewalk. I can go on and on...but whats the use. People want to blame something (FNMA and FHLMC) for their own greed and stupidity. FNMA and FHLMC exist for a reason. Take them away and watch values REALLY plummet. Because no one will be able to get financing that they can afford. Those of you who think you "agree with Obama" on this one.....are clueless.

    August 6, 2013 10:53 pm at 10:53 pm |
  15. Ugh

    I have a better idea, the government stays out of the loan industry altogether, doesn't lend to the banks at near zero interest, and doesn't guarantee anything. No special rules for the lenders, just the same rules they themselves have for each other in terms of bankruptcy and pursuing debts.

    A house should cost what the market is willing to pay for it. If the market can not afford something, the price needs to go down if you want to sell that thing.

    That is the very basis of capitalism, and our alleged democratic republic. The idea of the republic wasn't that banks get guaranteed streams of income and special rules to insulate them from all risk.

    Let's go back to what built this country, especially the roaring 50s and 60s, and see what worked then. And let's try to do that again.

    August 6, 2013 10:58 pm at 10:58 pm |
  16. Name Uche Agonsi

    That Obama has brought stability to the Mortage Business in US is cheery news. Americans should not suppress this gratitude if they should remember the frustrations, fears & confussion that reigned in the country during the bubble days. But Americans, especially the Conservatives, must not sold their conscience to 'THATCHERITE'. Its constitutional democracy & government interventionism is not ruled out in right circumstance.

    August 6, 2013 11:00 pm at 11:00 pm |
  17. Brian

    Isn't Freddie and Fannie at the head of the HARP program?

    August 6, 2013 11:02 pm at 11:02 pm |
  18. dcny

    next should be congress

    August 6, 2013 11:22 pm at 11:22 pm |
  19. Jordan

    It was only 'Tails you lose' because the gov't bailed them out. If they were left holding the bill there would have only been an investor gone broke making bad investments.

    August 6, 2013 11:26 pm at 11:26 pm |
  20. john

    Obama is not a socialist , Obama is a follower of Bush and Cheney and wants to destroy the legacy of Roosevelt and LBJ.

    August 6, 2013 11:27 pm at 11:27 pm |
  21. Michael Benjamin

    Nice chatter, but the GOP can not consider it since Obama wants to do it.

    August 6, 2013 11:49 pm at 11:49 pm |
  22. i12bphil

    For once I agree with him.

    August 6, 2013 11:57 pm at 11:57 pm |
  23. Amkosh

    If Fannie and Freddie go away, then you'll likely see a return to conditions before them. Meaning that to qualify for a loan, you'd need at least: 750 FICO score, 20% cash(not loan) down, 10% liquid reserve, and a 15-20 ratio. That basically would eliminate a majority of home buyers from ever being able to get a loan and refinance. Of course they don't mention FHA loans, but those will not be able to patch the hole.

    The long and the short of it is that most investors have little interest in real estate securities unless they are much lower risk.

    So I don't think most of the people in power would like that, especially the democrats, as they measure the middle class by home ownership, and that would evaporate.

    August 6, 2013 11:58 pm at 11:58 pm |
  24. chuck wagon

    one of these examples is a government backed insurance mortgage idea! Guess which one it is:

    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.

    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.

    August 7, 2013 12:10 am at 12:10 am |
  25. Daniel

    "Obama Tuesday called on Congress to allow all homeowners the opportunity to refinance at current rates."

    So take on more poorly performing mortgages...and lose enormous amounts of money in servicing rights so that we can start this whole process over again 18 months from now.

    August 7, 2013 12:14 am at 12:14 am |
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