President Barack Obama on Tuesday said he supports proposed legislation that would liquidate government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and called for reforms to the housing finance system to ensure that ‘the kind of [financial] crisis we just went through never happens again.’
In a speech before about 2,000 people at a high school in Phoenix – considered ‘ground zero’ for the housing meltdown that began in 2007 – Obama expressed support for pending bipartisan legislation in the Senate which aims to wind down the GSEs over five years, replacing them with a government guarantor that would act as a backstop in the event of another downturn.
The Housing Finance Reform and Taxpayer Protection Act of 2013, introduced by Sens. Bob Corker, R-Tenn., Mark Warner, D-Va., and six other members of the Senate Banking, Housing and Urban Affairs Committee, would transition the GSEs out of government conservatorship while, at the same time, protecting taxpayers during the transition process.
The proposal is being contrasted against an alternate, Republican-backed bill introduced in the House by Rep. Jeb Hensarling, R-Texas, which would also liquidate the GSEs, replacing them with a securitization platform, as well as significantly reducing the scope of the Federal Housing Administration (FHA). Unlike the Corker-Warner bill, the House proposal does not include any government guarantee for mortgages and would almost completely privatize the housing finance industry.
Regardless of what shape final legislation takes, Obama made it clear that he favors liquidating the GSEs.
‘For too long, [Fannie and Freddie] were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,’ Obama said. ‘It was 'heads we win, tails you lose.' And it was wrong.’
Obama said the Corker-Warner bill embodies the ‘four core principles for what I believe reform should look like,’ including the concept of bringing more private capital back into the mortgage market.
‘I know that must sound confusing to the folks who call me a raging socialist every day,’ he said, taking a dig at Republicans who have been critical of his social policies. ‘But just like the health care law that set clear rules for insurance companies to protect consumers and make it more affordable for millions to buy coverage on the private market, I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market, including community-based lenders who view their borrowers not as a number, but as a neighbor.’
In addition to bringing private capital back to the housing market, Obama said the federal government can no longer engage in its past policies of leaving taxpayers on the hook when major lending institutions fail and need a bailout as a result of risky deals. ‘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 – well, that puts the whole country at risk. We're not going to do that anymore,’ he said.
Obama also called for protection of safe and simple mortgage products like the 30-year, fixed-rate mortgage. ‘That's something families should be able to rely on when they make the most important purchase of their lives,’ he said.
The president called for a more concerted effort to keep housing affordable for all Americans. That means reforming the Federal Housing Authority (FHA), so that citizens on the lower end of the income scale have greater opportunity to purchase homes.
The president said although the country has made significant strides in ‘clearing the rubble’ of the financial crisis and stabilizing the economy, there is still more work to be done. Now is the time, he said, to ‘turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place. We've got to build a housing system that is durable and fair and rewards responsibility for generations to come.’
To that end, Obama outlined five steps that must be taken in order to further reform the housing finance system and bring certainty back to the market.
First, the president called on Congress to pass a measure giving every home owner the opportunity to refinance their mortgage at today's rates.
Second, although tighter standards have made it harder for reckless consumers to buy properties they cannot afford, the industry needs to find new ways to make it easier for qualified buyers to buy homes, he said. This can be achieved by simplifying overlapping regulations, cutting red tape and giving people who have worked hard to repair their credit a second chance.
Third, the government needs to repair the broken immigration system, because many of the immigrants who are now in the country illegally are potential home buyers.
Fourth, more needs to be done to rebuild the communities that were hardest hit by the housing crash. This includes razing vacant, run-down properties and building new housing, which in turn, will boost property values and put construction workers back to work.
Fifth, more needs to be done to ensure that people who can't or don't want to buy a home still have affordable rental options.
Obama also called on Congress to immediately allow an up-or-down vote on the confirmation of Mel Watt, his nominee to head the Federal Housing Finance Agency.
He also gave a nod to the Consumer Financial Protection Bureau for the work it's done so far to protect consumers from predatory lending practices.
‘Put all these principles together, that's going to protect our entire economy and it will improve the housing market not just here in Phoenix, but throughout the state and throughout the country,’ Obama said.
Following the speech, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), applauded the president ‘for laying out a vision for housing finance, with key elements similar to those embraced by many stakeholders, including MBA.’
‘This is an issue that affects the well-being of every American, whether a homeowner or a renter, and we welcome the president's attention and leadership,’ Stevens wrote in a statement. "Of particular importance is the president's insistence on transitioning the mortgage market toward a future state that will rely primarily on private capital, while at the same time ensuring sufficient liquidity and the availability of the affordable 30-year fixed rate mortgage, and mortgages that finance multifamily rental housing, in both good and bad times, through an appropriate use of a government guarantee.’
Stevens said the MBA was also encouraged by the president's desire for the development of a common securitization platform and risk-share options, ‘both of which are key components the MBA believes should be part of reforming the secondary mortgage market and can be implemented now without legislation.’