PHOENIX (Reuters) - President Barack Obama called on Tuesday for broad reform of the mortgage finance system to boost the U.S. housing market, help still-struggling homeowners, and prevent one of the triggers of the 2007-2009 financial crisis from happening again.
Obama picked Arizona to make his remarks, choosing a state that came to symbolize the painful bursting of the housing bubble in 2007 and 2008 that led to a wave of foreclosures and wiped out trillions of dollars in household equity.
“This was part of ground zero for the housing bubble bursting,” Obama said, addressing an audience of high school students and faculty in Phoenix, where house prices cratered and foreclosures soared five years ago.
“Today, our housing market is beginning to heal ... We’ve got to build on this progress, we’re not where we need to be,” he said.
The core of Obama’s proposal involves winding down mortgage finance giants Fannie Mae and Freddie Mac, which own or guarantee more than half of all U.S. home loans and are critical to keeping capital flowing to lenders and borrowers.
The two government-sponsored entities have drawn heavy fire for allowing people to take risks and buy homes they could not afford. A bipartisan bill already circulating in the Senate would wind down the two organizations, and Obama said the measure is in line with ideas he can support.
The administration wants to replace Fannie Mae and Freddie Mac with a system in which the private market buys home loans from lenders and repackages them as securities for investors.
The government would still play a role in housing markets by insuring or guaranteeing those securities - at a cost to investors.
“Private capital should take a bigger role in the mortgage market. I know that sounds confusing to folks who call me a socialist,” Obama said, inserting a dig at political opponents who paint him as a left-leaning liberal.
The United States was forced to prop up Fannie Mae and Freddie Mac when the two companies careened toward insolvency during the financial crisis, costing taxpayers $187.5 billion.
The companies, which still dominate mortgage markets, have since returned to profitability, funneling about $132 billion in dividends back into government coffers.
The president also urged Congress to pass long-stalled legislation to make it easier for homeowners to refinance their loans at lower interest rates.
While there is bipartisan progress in the Senate on mortgage finance reform, his proposals face a harder sell in the House of Representatives, where Republicans who control the chamber favor removing almost all of the government’s role from mortgage markets.
Republican Senator Bob Corker, who co-authored the Senate measure, said the president had provided a boost to mortgage finance reform efforts.
“There is real momentum growing to finally move a structural housing finance reform bill that ends the Fannie and Freddie model of private gains and public losses,” the Tennessee lawmaker said in a statement.
Edward Mills, an analyst at FBR Capital Markets, said Obama’s proposals were well-timed.
“There has been real concern about not doing something that disrupts the housing recovery. Now that we’ve seen housing come off its lows, there is this desire to say what’s the next step. This fills that void,” he said.
Mills cautioned against winding down Fannie and Freddie too quickly.
Obama’s speech is one of a series focused on spurring faster economic growth in the middle of a still tepid recovery. His campaign-like tour is meant to help set the stage for the 2014 congressional elections and, more immediately, lay out his views ahead of an expected budget battle in Washington this fall.
The president jabbed Republican adversaries over immigration and health care as well as housing. He argued that immigration reform - which is languishing in the House - would help the U.S. housing market because undocumented people were important buyers of homes.
Obama noted that Arizona’s two U.S. senators, Republicans John McCain and Jeff Flake, supported immigration reform.
Writing by Mark Felsenthal and Jeff Mason; Additional reporting by Margaret Chadbourn; Editing by Paul Simao