Obama Says Government Still Needed in Housing Market

By Hans Nichols & Clea Benson - Aug 7, 2013 10:15 AM GMT+0530

President Barack Obama is calling for private capital to take the lead role in the nation’s mortgage market with the U.S. government continuing to provide a backstop only against catastrophic risk.
In a speech yesterday in Phoenix, the president for the first time endorsed an approach to remake the housing finance system as Fannie Mae and Freddie Mac (FMCC) are wound down. He said the government still must play a role to preserve broad access to 30-year, fixed-rate mortgages that underpin the housing market.

 

U.S. President Barack Obama, right, and Housing Secretary Shaun Donovan tour Erickson Construction in Chandler, Arizona on August 6, 2013.

Aug. 6 (Bloomberg) -- President Barack Obama speaks in Phoenix about progress made in repairing the nation's economy and housing market, and his proposals to help complete the housing recovery. The president said private capital must take a bigger role in the nation’s mortgage market with the U.S. government continuing to provide a backstop only against catastrophic risk. (Source: Bloomberg)

“I believe that our housing system should operate where there’s a limited government role and private lending should be the backbone of the housing market,” Obama said in Phoenix, one of the U.S. cities hardest hit by falling home prices and waves of foreclosures after the collapse of credit markets in 2008.
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.
As he has in the past, Obama blamed “recklessness” on the part of lenders and borrowers for the housing bubble and subsequent collapse of the market as the nation fell into the deepest recession since the 1930s. Now, he said, the market is healing, with prices rising and foreclosures declining.

Turning Page

“We’ve got to turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place,” Obama said. “We’ve got to build a housing system that is durable and fair and rewards responsibility for generations to come.”
Nationwide, real-estate values are climbing at the fastest pace since 2006 as improving employment helps draw buyers into the market for a tight inventory of homes.
Prices rose 7.3 percent in the year through May, according to the Federal Housing Finance Agency. The number of homes for sale fell 5 percent to 1.74 million in January from the year-earlier period, the fewest since December 1999, according to the National Association of Realtors.
Obama said 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.

New System

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 (FNMA) 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.
Warner said in a statement that the bipartisan Senate proposal “will end the current Fannie and Freddie model of private gains and public losses.”

House Bill

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.
Hensarling said yesterday that the House version would achieve the goals set out by Obama, and he faulted government policies that he said “browbeat financial institutions to loan money to people to buy homes they ultimately could not afford.”
The White House would support additional measures ensuring that housing is affordable for first-time homebuyers and renters, according to Obama administration 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 yesterday. “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.”

Immigration Impact

The president also called for passage of a new immigration law, citing home purchases by immigrants as a boon to the market.
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. (AMZN) distribution center to argue for a lower corporate tax rate, with initial revenue designated for jobs programs.
He left Phoenix yesterday for Los Angeles, where he was to spend the night. He recorded an appearance on NBC’s “Tonight Show with Jay Leno,” his sixth time on the program, the fourth as president.
Today, Obama plans to field questions during an online session on Zillow Inc. (Z)’s real-estate information website. Later, he will visit the U.S. Marine Corps base at Camp Pendleton, about 80 miles (129 kilometers) south of Los Angeles, before returning to Washington.
To contact the reporters on this story: Hans Nichols in Phoenix at hnichols2@bloomberg.net; Clea Benson in Washington at cbenson20@bloomberg.net