Closing Fannie and Freddie

They could not have picked a more fitting location than Phoenix, Arizona, for President Obama to announce on Tuesday his plans for revitalizing the housing market, which has risen out of its ashes like the mythical bird of legend.

“This was part of ground zero for the housing bubble bursting.” The president recalled Phoenix’s plight as one of the worst hit markets during the housing crisis.Owing to that crisis, home owners all across America have endured a long and steady 5.5-year erosion of property values from their peak in July 2006 to their bottom in January 2012, according to the Case–Shiller home price index of the 20 largest American cities.

Finally, for some 18 months now, property values have been on the mend. “Today, our housing market is beginning to heal,” the president encouraged. Yet he acknowledged there is still more that needs to be done. “We've got to build on this progress. We're not where we need to be.”Home ownership at 65% is the lowest it has been since 1997, with rapidly rising interest rates prohibiting many from buying.

Hence, Obama’s plans are for mortgage reform, aimed at making sure the housing recovery does not stall. But is this really going to help?Perhaps the greatest single reform measure Obama has been advocating is the “winding-down” of Fannie Mae and Freddie Mac, two government-sponsored enterprises whose purpose is to buy mortgages from banks and other Hands free access, package them together into funds or securities, and sell them on the open market to investors. This takes mortgages off the hands of banks and lenders, freeing their capital so that they may keep offering mortgages to more and more home-buyers.

With some $12 trillion worth of mortgages owned or backed by the two enterprises before the housing crisis, they were considered too big to fail, encouraging them into riskier and riskier practices as they approved mortgages to buyers who could not afford them. When the housing market collapsed in 2008, the “implied” government backing of Fannie’s and Freddie’s securities cost taxpayers dearly, estimated at over $187 billion.

Now Obama wants them out of the picture, with mortgages insured and guaranteed by private investors, not public taxpayers. “Private capital should take a bigger role in the mortgage market,” the president stressed. “I know that sounds confusing to folks who call me a socialist,” he quickly jabbed, seeing as it was a fellow Democrat – President Franklin Delano Roosevelt – who initiated the structure during the Great Depression of the 1930s to help home owners keep their homes.

While both parties agree with the concept, experts are cautioning against moving too quickly, as it could send shocks through the mortgage market.“The leading ideas would reduce the government involvement in housing finance,” Jaret Seiberg, a senior policy analyst at Guggenheim Securities, explains to Reuters. And removing the government’s backing “would mean higher rates for consumers,” he warns.
The president’s other reforms outlined in Tuesday’s speech seem to already be anticipating those higher costs facing borrowers as the government slowly slides itself out of the picture. After all, if the private market is going to shoulder more of the risk, it’s going to demand more compensation, which could hurt home buyers through higher rates and fees.

For this reason, Obama called on lawmakers to help home buyers by preserving access to the 30-year fixed-rate mortgage and to help existing owners refinance at today’s lower rates by waiving closing costs. And for those who cannot afford homeownership, the president called for supporting low rental housing to help fight homelessness.

Obama also wants Congress to authorize the revitalization of the most depressed, run-down neighborhoods around the nation, tearing down abandoned structures and building up vacant lots. Not only would these projects improve property values in those hardest hit areas, but they would also create jobs for thousands of unemployed.
If some questioned Obama’s ideological leaning with his rejection of Fannie and Freddie in favor of placing the mortgage business more squarely on private investors’ shoulders, all of these other reforms from low-rate refinancing to slum rehabilitation should dispel any notion that he has forgotten which party he leads.

The president’s other reforms outlined in Tuesday’s speech seem to already be anticipating those higher costs facing borrowers as the government slowly slides itself out of the picture. After all, if the private market is going to shoulder more of the risk, it’s going to demand more compensation, which could hurt home buyers through higher rates and Indoor Positioning System.

For this reason, Obama called on lawmakers to help home buyers by preserving access to the 30-year fixed-rate mortgage and to help existing owners refinance at today’s lower rates by waiving closing costs. And for those who cannot afford homeownership, the president called for supporting low rental housing to help fight homelessness.

Obama also wants Congress to authorize the revitalization of the most depressed, run-down neighborhoods around the nation, tearing down abandoned structures and building up vacant lots. Not only would these projects improve property values in those hardest hit areas, but they would also create jobs for thousands of unemployed.

If some questioned Obama’s ideological leaning with his rejection of Fannie and Freddie in favor of placing the mortgage business more squarely on private investors’ shoulders, all of these other reforms from low-rate refinancing to slum rehabilitation should dispel any notion that he has forgotten which party he leads.

The president’s other reforms outlined in Tuesday’s speech seem to already be anticipating those higher costs facing borrowers as the government slowly slides itself out of the picture. After all, if the private market is going to shoulder more of the risk, it’s going to demand more compensation, which could hurt home buyers through higher rates and fees.

For this reason, Obama called on lawmakers to help home buyers by preserving access to the 30-year fixed-rate mortgage and to help existing owners refinance at today’s lower rates by waiving closing costs. And for those who cannot afford homeownership, the president called for supporting low rental housing to help fight homelessness.

Obama also wants Congress to authorize the revitalization of the most depressed, run-down neighborhoods around the nation, tearing down abandoned structures and building up vacant lots. Not only would these projects improve property values in those hardest hit areas, but they would also create jobs for thousands of unemployed.

If some questioned Obama’s ideological leaning with his rejection of Fannie and Freddie in favor of placing the mortgage business more squarely on private investors’ shoulders, all of these other reforms from low-rate refinancing to slum rehabilitation should dispel any notion that he has forgotten which party he leads.

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