President Obama lays out his vision Tuesday for winding down the mortgage giants Fannie Mae and Freddie Mac – almost five years after the housing bust wrecked the economy and the two companies became wards of the federal government.
Obama has shrewdly chosen to speak in Phoenix, a city devastated by the shoddy lending practices and overbuilding that fueled the housing boom and eventual implosion.
He can speak about the rebound in home values, even as his administration appears to have a limited impact on the improving prices. Some of this has to do with flaws in handling programs meant to encourage mortgage refinancing, in addition to opposition from GOP lawmakers who campaigned against anything that sounds likes a federal bailout.
The mortgage sector has been on government life-support for the entire Obama administration, with taxpayers pumping in $187.5 billion to keep Fannie and Freddie afloat. Obama wants reforms that bring more private capital into the mortgage industry, while keeping a smaller government program so that homes can remain affordable.
So why is he doing this now? Some thoughts:
HE CAN ATTACK HOUSE REPUBLICANS
In his recent economic speeches, Obama claims that GOP lawmakers have blocked his agenda to protect the middle class.
This narrative lets him blast House Republicans whose plan to eliminate Fannie and Freddie – largely removing the mortgage industry’s government backstop – would kill the 30-year, fixed rate mortgage. Instead, more Americans would take variable interest rate mortgages that might need to be refinanced on a regular basis.
The House Financial Services Committee passed its plan in a party-line vote last month. Committee Chairman Jeb Hensarling (R-TX), at a hearing on the bill, said that fixed rate mortgages are a “gold standard” for some, but a “rusty tin standard” for others.
The 30-year, fixed rate has become a central piece of the middle class move into home ownership, a form of lending only made possible because the government began to guarantee mortgage payments after the Great Depression.
It’s a chance for Obama to highlight his belief that the government can help the middle class, while dinging his rivals.
THE WINDOW FOR REFORM IS CLOSING
Fannie and Freddie are starting to pay back the majority of the $187.5 billion they received from taxpayers. As they return to profitability, the urgency to reform them begins to disappear.
That’s the opinion of Sen. Bob Corker (R-TN), who has co-sponsored a bipartisan bill that would dissolve both companies while preserving the government backstop.
“People understand that this is the one piece of unfinished business,” Corker said at a recent panel discussion hosted by the Bipartisan Policy Center. “Most Republicans realize that the window is closing. In other words, if we don’t take action soon, it’s going to be difficult to take action.”
MORTGAGE RATES ARE RISING
This is a victory lap for Obama. Home prices in Phoenix average $185,000, a more than 60 percent increase from the 2011 lows. Values peaked during the boom at $260,000 – it’s not as if prices have fully recovered yet, the Associated Press noted.
Wall Street economists generally expect the housing recovery to continue. But the cost of buying a home is increasing in a way that could limit purchases, so it makes sense to push for federal fixes before that happens.
As the Federal Reserve has entertained an end to its policies for lowering interest rates, 30-year mortgage rates have climbed to 4.39 percent after being in the low 3 percent range earlier this year, according to a Freddie Mac survey.