August 6th, 2013
04:40 PM ET
1 year 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. Reality

    Finally...the guy does something right!...but it will never happen..You wanna see how fast rates will rise? .Private capital will never invest en masse.

    August 7, 2013 06:15 am at 6:15 am |
  2. lgccac

    Watch the other hand with this guy.

    August 7, 2013 06:46 am at 6:46 am |
  3. Peter

    A lot of people on the right have been saying this all along, but watch the right now be against it because Obama is for it!

    August 7, 2013 06:50 am at 6:50 am |
  4. Roy

    It would be nice to phase out obama.

    August 7, 2013 07:00 am at 7:00 am |
  5. humtake

    Uh oh, is this the sign of the end times? The new messiah Obama is directly contradicting what the previous Democratic messiah did. I wonder if Clinton is going to get mad or just find another intern to play with.

    August 7, 2013 07:08 am at 7:08 am |
  6. Przemek

    How about they phase out the FED and the IRS?....the guy lacks fundamental understanding of economics and will never learn.

    August 7, 2013 07:21 am at 7:21 am |
  7. John

    Could we please postpone the phase-out until they've paid off their debt?

    August 7, 2013 07:23 am at 7:23 am |
  8. Walt

    "We can't leave taxpayers on the hook for irresponsibility or bad decisions by these lenders or Fannie Mae and Freddie Mac,"

    And we should not allow us taxpayer to remain on the hook.

    The people who run these mortgage lenders, or Fannie Mae, or Freddie Mac, should be held personally and financially responsible. No exceptions. No excuses. Every penny of their bailout, should be repaid out of their own pockets, and back in the taxpayer's coffers.

    August 7, 2013 07:27 am at 7:27 am |
  9. Donnie

    The headline got me. First I was like yes, an idea I can get behind. Then I read this ". . . replace them with a new agency insuring mortgage-backed securities," and I'm like that isn't getting rid of the problem it is renaming it.

    August 7, 2013 07:29 am at 7:29 am |
  10. Equal share for everyone!

    So, give them a $187b check and then say it shouldn't have been done? Can you say "Wishy-Washy"?

    August 7, 2013 07:30 am at 7:30 am |
  11. Rosslaw

    Obama-one of the world's worst socialists of all time.

    August 7, 2013 08:14 am at 8:14 am |
  12. Anonymous

    When i hear anyone in this administration say the words "Grand Bargain" it sends a shiver down my spine! Also, Fannie/ Freddie will never payback the obligations and money that was given to them...hell, just last year they were giving each other6 diget raises to top employees . The American Tax payer will never see that money again.

    August 7, 2013 08:17 am at 8:17 am |
  13. jsmoulder

    "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."

    I can't believe he said that. Someone running his teleprompter has suddenly become intelligent.

    August 7, 2013 08:17 am at 8:17 am |
  14. Wayne

    I think the proposal is a good one, but this needs to be drawn down very carefully. The plan to phase them out to a MBS insurance agency is a good first step, the next step should be phasing out MBS insurance to reinsurance, then a small remnant designed to help people get started. Just cutting it off as some above suggest would stifle 30-year mortgage lending and devestate the real estate market. Doing that just to say it's not socialism wouldn't be a good move.

    August 7, 2013 08:36 am at 8:36 am |
  15. Jac

    When the GOP tried to reign in the GSE's in the early 2000's, the Democrats were livid.

    Maxine Waters – "I am against these regulations, as it would interfere with the innovation of supplying mortgages to people with imperfect credit."

    August 7, 2013 08:38 am at 8:38 am |
  16. Lord Toronaga

    Phase out the BATF while you are at it. Why are alcohol, tobacco and firearms lumped together and a government swat team created to enforce the rules.

    August 7, 2013 08:59 am at 8:59 am |
  17. jimmorrisonmania

    You can't put all the blame for fannie and freddie on Obama..Bush is the one who started handing out billions to these and other banks. Bush walked away with a war chest of $100,000,000. Gee I wonder if any of that money came from fannie and freddie and the other banks that were bailed out.

    August 7, 2013 09:19 am at 9:19 am |
  18. Rudy NYC

    Jac

    When the GOP tried to reign in the GSE's in the early 2000's, the Democrats were livid.

    Maxine Waters – "I am against these regulations, as it would interfere with the innovation of supplying mortgages to people with imperfect credit."
    --------------------–
    Republicans did not try to any such thing. In fact, they provided grants to people so that they could make down payments and take out mortgages that they could not afford. The Republican controlled Congress passed a bill called the "American Dream Downpayment Initiative, ADDI for ahort, which Bush signed into law. Most of these mortgages contained the language that caused them to blow up years later, precipitating the crisis at Fannie and Freddie in 2008.

    August 7, 2013 09:24 am at 9:24 am |
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