(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.
