President Barack Obama will propose overhauling the U.S. mortgage finance system in a speech on Tuesday, weighing in on a tangled and polarizing problem that was central to the devastating financial crisis in 2007-2009 and that continues to slow the economic recovery, the White House said.
Obama will propose eliminating mortgage finance entities Fannie Mae and Freddie Mac over time, replacing them with a system in which the private market buys home loans from lenders and repackages them as securities for investors, senior administration officials said. The mortgage securitization process is deemed essential to the smooth flow of capital to housing markets and the availability of credit.
The government's role would be relegated to providing some form of insurance or guarantee, and to providing oversight, according to officials and a White House statement.
Fannie Mae and Freddie Mac, originally chartered by Congress to expand mortgage finance, were taken over by the government in 2008 amid mounting losses in the financial crisis. Propping them up cost taxpayers $187.5 billion, although the firms have now returned to profitability.
"We have to end Fannie and Freddie going forward and replace them with a commitment to the notion that private capital must be wiped out before the government pays on any form of catastrophic guarantee or reinsurance," a senior administration official told reporters.
The departments of Treasury and Housing and Urban Development have been working on an outline for housing finance reform. They outlined several options in a white paper to Congress in 2011.
After plunges in home values that wiped out an estimated $7 trillion in homeowner equity and wrecked many Americans' finances, housing markets are staging a modest recovery. Obama, as part of a series of speeches pushing for steps to boost tepid economic growth, is focusing on housing issues in a speech in Phoenix, Arizona, in one of the regions hardest hit by the housing bust.
The president generally agrees with the bipartisan Senate proposal that would replace Fannie and Freddie with a system that would allow private firms to securitize mortgages, a senior administration official told reporters in a conference call. A government reinsurer of mortgage securities could backstop private capital in a crisis, the official said.
Obama would want the Senate measure to go farther in helping first-time home buyers and in making sure affordable rental housing is available, the official added.
The Senate bill, though, remains at odds with the bill advancing in the Republican-controlled House of Representatives that would liquidate Fannie Mae and Freddie Mac over five years and limit government loan guarantees.
RESTRUCTURING MORTGAGE SYSTEM TO TAKE YEARS
Fannie Mae and Freddie Mac became dominant players in housing finance when private lending to home-buyers declined after the financial crisis. The government-backed companies own or guarantee more than half of all U.S. home loans and are critical to keeping capital flowing to lenders and borrowers.
Restructuring of the $11 trillion mortgage finance system is expected to take years. Any overhaul must also include a mechanism to maintain stability for the 30-year-fixed rate mortgage even in shaky financial markets, the official said.
Mortgage finance reform should also incorporate a fee on mortgage products to be paid by financial firms that would help fund for lower-income families buy homes, the official added.
Analysts say more robust housing activity is being held back by tight credit. Clearing up questions about the future of Fannie Mae and Freddie Mac could help unlock capital for mortgage finance and give housing activity a boost.
"On Capitol Hill, the odds are against short-term legislation," said Jaret Seiberg, a senior policy analyst at Guggenheim Securities. "Longer-term housing finance reform is gaining momentum. The leading ideas would reduce the government involvement in housing finance, which would mean higher rates for consumers."
The administration is also reinvigorating its effort to help underwater borrowers by pushing for an expansion of refinancing for those who purchased homes when rates were above the current historic lows, the White House said. By refinancing, borrowers could save hundreds of dollars a month, adding to their disposable income and stimulating the economy, officials said.
So far, legislative efforts to expand refinancing programs have failed in Congress.
Obama's nominee to oversee Fannie Mae and Freddie Mac, veteran Democrat Representative Mel Watt, has failed to garner enough support for confirmation in the full Senate.
Administration officials are also urging lawmakers to bring Watt's nomination to the Senate floor as part of broader efforts to overhaul the overhaul nation's decades-old housing financial system.