WASHINGTON Aug 5 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
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
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
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