President Obama on Tuesday sought to prod along a rare bipartisan effort in Congress by throwing his weight behind a Senate bill that would eliminate mortgage giants Fannie Mae and Freddie Mac but maintain a government guarantee on high-quality 30-year mortgages so that the popular instruments do not disappear from the marketplace.
The president waded into the finance debate in a broad speech on housing in Phoenix, the U.S. city that was arguably the epicenter of the historic housing market collapse of the past decade. The Southwestern city is now rapidly rebounding and leading the country in housing sales and prices, with a robust 20 percent gain in the past year.
Mr. Obama signaled that he wants to build on the momentum of the strong housing recovery by ending the uncertainty over the government's now-dominant role in the mortgage market and devolving it largely to private banks and investors, where it was before the crisis. On that point, all parties agree. Republicans and Democrats alike praised the president for moving forward the chance for major housing reform this year.
Mr. Obama did not provide specifics about how to phase out Fannie and Freddie, which along with the Federal Housing Administration back about 90 percent of all mortgages, but he implicitly rejected the approach favored by House Republicans in endorsing a bipartisan Senate bill and its proposal to maintain the guarantee they now provide on the most popular loans, 30-year mortgages.
Housing analysts have warned that without any government backing, 30-year loans likely would disappear in a fully private mortgage market such as the one approved last month by the House Financial Services Committee, and consumers would be forced to take out shorter-term loans.
"Private capital should take a bigger role in the mortgage market," but "our housing system must have a limited government role," Mr. Obama said, noting that such long-term housing loans have been the mortgage of choice of the American middle class since the 1930s. He said the government also must continue to heavily regulate the kinds and terms of mortgages offered to consumers to ensure the abuses that led to the housing crisis do not crop up again.
"A home is supposed to be our ultimate evidence that in America, hard work pays off, and responsibility is rewarded," he said, adding that he wants to return to the kinds of stable housing and finance markets enjoyed by his grandparents and end the prospect that the markets are taken over again by speculators and homeowners trying to flip homes for quick profits.
Separately, the Securities and Exchange Commission and Justice Department announced charges Tuesday against Bank of America over mortgage bonds it sold to investors in 2008, allegedly without disclosing the extreme risk of the underlying mortgages, which they said were "riddled" with "evidence of mortgage fraud" and other abuses. It was the latest in a series of enforcement actions against the major banks involved in the mortgage crisis.
Immigration bolsters housing
Mr. Obama said Congress also could add fuel to the housing recovery by passing an immigration reform bill that provides an avenue to citizenship for millions of people in the country illegally. He noted that immigrants accounted for nearly half of all home sales in recent decades and, as the fastest-growing part of the population, would continue to play a critical role in the housing market.
"According to one recent study, the average homeowner has already seen the value of their home boosted by thousands of dollars, just because of immigration," he said. "When more people buy homes, and play by the rules, home values go up for everybody."
The Senate has passed a bipartisan immigration reform bill, but the House has not acted. Mr. Obama is calling on House Republicans to stop taking a partisan approach on housing and immigration and approve bipartisan legislation that has a chance of passing both chambers and getting his signature.
The speech Tuesday was the first time Mr. Obama has laid out a set of principles for reform of an ailing housing finance system in which abuses in the past decade precipitated the 2008 global financial crisis and ensuing Great Recession, both of which were the worst in the U.S. since the Great Depression. In 2010, the Treasury Department laid out options for reform without taking a position on which one to pursue.
Despite widespread agreement on eliminating Fannie and Freddie, Congress also has been slow to move toward reform in light of the overwhelming government role in supporting the still-weak mortgage sector.
The bipartisan bill that emerged in the Senate for the first time this year was the work of Sen. Bob Corker, Tennessee Republican, Sen. John W. Warner, Virginia Democrat, and other key members of the Senate Committee on Banking, Housing and Urban Affairs. The House committee also drafted and approved a bill last month that would go further toward privatization and entirely eliminate the government role in the finance market — a key difference with the Senate and administration.
With the housing market firmly in recovery, Fannie and Freddie are producing huge profits that have enabled them to pay back a large share of the $187 billion in taxpayer bailouts they received in their five years of government conservatorship by turning over their profits to the Treasury in the past year. As a result, Congress and the administration appear to be more willing to act on reforming the system.
Corker says time is ripe
Mr. Corker was prompted to seek a bipartisan approach in part because of worries among some in Congress that it might keep Fannie and Freddie as they are, now that they are turning over large profits to the government and helping reduce the budget deficit,
He hailed the president's endorsement of the bill he co-authored as a sign that the time is ripe for finance reform. It has been nearly five years since the government took the unprecedented step of taking over Fannie and Freddie and backing all their trillions of dollars of mortgage obligations.
"There is real momentum growing to finally move a structural housing finance reform bill that ends the Fannie and Freddie model of private gains and public losses," he said. Mr. Corker's bill would wind down Fannie and Freddie's operations over five years and replace them with a government "utility" to provide guarantees. It would be modeled on the Federal Deposit Insurance Corp., which guarantees bank deposits.
Mr. Corker's bill also would create a "market access fund" seeded with fees paid to the guarantee agency, which would support affordable rental housing and other housing goals now spread more amorphously among Fannie, Freddie and the rest of the government.
Mr. Obama appeared to endorse that approach as well, noting that with fewer people now able to qualify for mortgages, the government must help ensure that affordable rentals are available for the more than one-third of citizens who do not opt for homeownership.
Rep. Jeb Hensarling, Texas Republican and House Financial Services Committee chairman, applauded the president for coming out in favor of privatizing the mortgage market.
But he took issue with Mr. Obama and other critics who say his committee's bill would lead to the elimination of 30-year mortgages because, the critics say, in a privatized market, interest rates on such loans would reflect today's high default rates and rise to prohibitively high levels. Rates on such loans are near record lows in the 4 percent range.
Mr. Hensarling noted that consumers can get jumbo mortgages that are not guaranteed by Fannie or Freddie with 30-year terms, albeit at significantly higher interest rates, demonstrating that the private market for such loans is viable without government support.
David H. Stevens, the president of the Mortgage Bankers Association, said the principles outlined by Mr. Obama are close to his association's goals and pledged to work with the administration and both parties to try to enact a bill.
"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," he said.
"It will continue to be critical that the White House and Congress work in a bipartisan, cooperative manner," he said.
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