PHOENIX — President Obama on Tuesday got behind a bipartisan push to replace housing finance giants Fannie Mae and Freddie Mac with a new government approach to mortgage guarantees, criticizing a system that let bailed-out firms profit while taxpayers covered their bad bets.
"As home prices rise, we can't just re-inflate another housing bubble," Obama told a crowd in Phoenix, a city hit hard by the housing crisis five years ago.
Congress should invest in the recovery of the housing market, he said, while also working to "lay a rock-solid foundation to make sure the kind of crisis we went through never happens again. And one of the key things to make sure it doesn't happen again is to wind down these companies that are not really government, but not really private sector; they're known as Freddie Mac and Fannie Mae."
But even as he endorsed an end to the mortgage giants, which were seized by the government in 2008, the president also vowed to protect the consumer-friendly products they help provide. Obama emphasized the importance of 30-year fixed-rate mortgages popular among middle-class homeowners, which many Democrats said would be threatened by a House Republican bill to overhaul housing finance.
"That's something families should be able to rely on when they're making the most important purchase of their lives," Obama said.
In his most vigorous public attempt to influence housing policy this year, Obama proposed to remake the nation's troubled housing finance system and deal with the biggest bailout recipients of the crisis. In so doing, he essentially backed a bipartisan bill introduced in June by Sens. Bob Corker (R-Tenn.) and Mark R. Warner (D-Va.).
Warner said Tuesday that Obama's support would provide added momentum to the bill. "Our bipartisan Senate approach protects the taxpayers while maintaining access to affordable mortgage credit," Warner said. "It also ends the Fannie and Freddie model of private gains and public losses."
The proposal offers Obama a chance to have his hand in legislative action that effectively condemns the unpopular bailouts of the two companies, the most expensive of those stemming from the 2008 financial crisis.
The measure would phase out the companies over five years and replace them with a new government agency modeled on the Federal Deposit Insurance Corp. The agency would be funded by industry fees and play a much smaller role in guaranteeing mortgages than Fannie and Freddie, former quasi-private companies now under government conservatorship.
The collapse of the subprime housing market pushed Fannie and Freddie near bankruptcy, and the government stepped in to save them. Taxpayers have pumped $187.5 billion into the companies to cover losses. But as the housing market has improved, the companies have paid the government $131.6 billion in dividends.
There's broad agreement among Democrats and Republicans that the two companies should be shut down as part of an overhaul. But Tuesday was the first time that Obama endorsed a specific approach. As he did, he indirectly rejected a Republican plan passed by the House Financial Services Committee last month that also would shut down Fannie and Freddie but would not replace them with a new government guarantee.
Many Democrats say that would wipe out the 30-year fixed-rate mortgage by making it too expensive. Republicans reject that contention, noting that there still would be government guarantees through other agencies, such as the Federal Housing Administration.
"Our plan … puts private capital at the center of the housing finance system, ends the bailout of Fannie Mae and Freddie Mac and sustains the 30-year fixed-rate mortgage — all goals the president today says he supports," House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said.
Edward Mills, a financial policy analyst at FBR Capital Markets & Co., said that in pushing to preserve broad access to the 30-year fixed-rate mortgage, Obama was standing up for something "as American as apple pie."
"I think one of the narratives that came out of the housing crisis was the 30-year mortgage should be the gold standard and where borrowers got into trouble is where we veered away from the 30-year fixed-rate mortgage," Mills said. "At the bare minimum under the Hensarling bill, mortgages would be more expensive and the availability of the 30-year fixed-rate mortgage would be decreased."
Delivered in the gymnasium of Desert Vista High School, the speech was Obama's fifth economic address in a summer he has devoted to laying out his plan to encourage the recovery.
The venue was chosen to underscore that rebound. When Obama traveled to Arizona in 2009, a month after taking office, the state was reeling from the implosion of the housing market. Home values had taken a nearly 20% dive and a record number of people were behind on their mortgages.
Today the market is on the mend. Home prices in the Phoenix area soared 20.6% year over year in May, according to the Standard & Poor's/Case-Shiller home price index. The city was the first on the 20-city index to begin posting steady gains last year as investors flooded that beaten-down market to scoop up cheaply priced homes.
But there is more to do, Obama told the crowd as he outlined a broader housing plan that draws heavily on his past prescriptions. He urged Congress to simplify overlapping regulations to help "responsible families" that want to get a mortgage but are rejected by banks.
He also called on lawmakers to pass comprehensive immigration reform, drawing enthusiastic applause from the crowd. Immigration drives up property values, Obama argued, because "when more people buy homes and play by the rules, home values go up for everybody."
Congress has not signed on to many of those ideas, and Republican lawmakers did not signal a change of heart after Obama laid them out Tuesday.
Nor are they excited about the appointee that Obama has named to lead the changes in federal housing finance reform, Rep. Melvin Watt (D-N.C.), whose confirmation was on hold as Congress broke for August recess.
But there may be room for discussion on the principles the president laid out for Fannie Mae and Freddie Mac reform. Advisors say the president is encouraged by the bipartisan cooperation in the Senate and wants to work closely with the Senate Banking Committee.
"Similar to what we've seen on immigration reform, he's not going to agree on every detail," said Housing and Urban Development Secretary Shaun Donovan, who joined Obama for the trip.
Donovan said the Senate bill meets Obama's principles, "but he does want to see them go farther on certain areas, particularly on making housing affordable."