President Barack Obama will call for Fannie Mae and Freddie Mac to be replaced with a government mortgage reinsurer that would sustain losses only in catastrophic circumstances.
The president, in a speech today in Phoenix, will also renew calls for Congress to make it easier for homeowners to refinance their loans, according to administration officials.
The president until now has refrained from endorsing a particular approach to remaking the nation’s housing finance system, seeking to avoid a partisan battle. Today he will outline basic principles that mirror those in a Senate bill backed by both Democrats and Republicans.
“A reformed system must have a limited government role, encourage a return of private capital and put the risk and rewards associated with mortgage lending in the hands of private actors, not the taxpayers,” the White House said in fact sheet released to reporters yesterday.
Obama’s trip to Phoenix is the latest campaign-style effort to put pressure on Congress to pass measures to help boost economic growth. Last week, he traveled to Chattanooga, Tennessee, and visited an Amazon.com Inc. distribution center to argue for a lower corporate tax rate, with initial revenue designated for jobs programs.
The president today also will call for passage of a new immigration law, citing home purchases by immigrants as a boon to the market, said the officials, who asked not to be identified to discuss the plan prior to Obama’s speech. While in Phoenix, the president’s itinerary includes visits to a construction company and a local high school.
Obama will announce that borrowers with foreclosures or bankruptcies resulting from a job loss will be able to finance a home purchase with a Federal Housing Administration mortgage as long as they are back at work, demonstrate 12 months of timely payments, and complete housing counseling. The FHA, a government mortgage insurer, now requires a three-year wait.
Obama’s call for a government mortgage reinsurer comes as administration officials have been quietly aiding efforts in the Senate to craft a bill that would create a new mortgage system. Tennessee Republican Bob Corker and Virginia Democrat Mark Warner in June introduced the measure, which would require private capital to take at least 10 percent of the first losses on mortgage securities. The government would step in with more aid during a financial catastrophe.
The White House would support additional measures ensuring that housing is affordable for first-time homebuyers and renters, said the officials.
“We can’t go back to the housing-finance system that we had before,” Shaun Donovan, secretary of the Department of Housing and Urban Development, said on Bloomberg Television today. “We can’t go back to a place where trillions and trillions of dollars of wealth is wiped out and the world economy is put at risk.”
The goal, he said, is building “a safe, simple, rock-solid housing finance system for the future that helps more families get into the middle class and stay in the middle class.”
A new system would replace Fannie Mae and Freddie Mac, which drew $187.5 billion in aid from the U.S. Treasury after investments in risky loans pushed them to the brink of insolvency. The two companies, which were taken into U.S. conservatorship in 2008, provide liquidity to the mortgage market by buying loans from banks and packaging them into securities on which they guarantee payments of principal and interest, freeing up the banks to make more loans.
Fannie Mae and Freddie Mac returned to profitability as the housing market rebounded. They’ve paid the Treasury $131.6 billion in dividends, which count as a return on the U.S. investment in the firms and not as a repayment of their debt to taxpayers.
In the House, Republicans have drafted a bill that would wind down Fannie Mae and Freddie Mac with no government-backed replacement. Written by Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, the measure would leave the FHA as the sole U.S. mortgage backstop. No Democrats are backing the legislation.
With Congress in recess, and Obama at odds with congressional Republicans over a long-term deficit-reduction package, the president is turning his attention to smaller economic proposals. He reframed his priorities with a July 24 speech at Knox College in Illinois on how to reduce wage inequality and spur job growth.
When members of Congress return in September, they and the president will need to fund the government for the coming fiscal year and address the need to raise the government’s $16.7 trillion debt limit.