Obama Urges Overhaul of Fannie and Freddie

Almost five years after U.S. taxpayers bailed out Fannie Mae and Freddie Mac, President Barack Obama said Tuesday it is time for private investors to take a bigger role in the housing mortgage  market.

In a speech today in Phoenix, Ariz., President Obama called for a continued but limited government role to backstop the U.S. mortgage market, replacing Fannie and Freddie with a bigger private-sector entity. He endorsed bipartisan efforts in the Senate to wind down the two companies and end their longtime implicit guarantee of a federal government bailout.

“For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” said Obama.

In recent weeks, two legislative proposals have emerged, one in the House and another in the Senate, calling for the unwinding of Fannie and  Freddie. The House bill, engineered by Texas Republican Rep. Jeb Hensarling, chairman of the House Finance Services Committee, called the Protect American Taxpayers & Homeowners Act, or PATH, seeks no role for the government-sponsored enterprises (GSEs) in housing  finance. Hensarling’s bill aims to snuff out Fannie and Freddie after five  years and turn them into private-sector companies with no government backing.

A bipartisan Senate bill, nurtured by Tennessee Republican Bob Corker and  Virginia Democrat Mark Warner, also calls for the elimination of Fannie and Freddie after five years and creates a new private secondary mortgage marketplace. The Housing  Finance Reform and Taxpayer Protection Act would create a Federal Mortgage Insurance Corp. to insure 90 percent of a loan in the event of  a housing bust or financial crisis.

“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, and I look forward to working with my colleagues in the Senate, the House and the White House to see it through,” said Corker.

Even though Fannie and Freddie own or guarantee more than half of  the nation’s $10 trillion in outstanding mortgage debt, there’s little appetite in Congress to permit the two GSEs to exploit their federal charters and expose American taxpayers to another bailout when their balance sheets blow up.

Following the collapse of the mortgage companies in 2008, the federal government injected  $187 billion into Fannie and Freddie and is still owed about $55 billion, which is being paid back via dividends from special preferred stock.

Many analysts believe a resolution to the Fannie-Freddie problem is essential for a full recovery of the housing market.  Hensarling’s bill is too conservative for the Senate, and the Corker- Warner  proposal is too liberal for the House. The difference between the House and Senate bills underscores the difficulties in Congress to reform housing finance. So expect to see some form of new, hybrid system evolving with private capital.

But don’t hold your breath waiting for a speedy resolution to the Fannie-Freddie drama. It could take another five years before this issue is resolved.

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