WASHINGTON -- The U.S. government may continue to play an outsized role in the nation’s roughly $10 trillion home loan market under a proposal President Barack Obama is set to endorse on Tuesday.
The plan, along with a sweeping set of new and old housing recommendations and ideas, will be unveiled in Phoenix, as Obama launches his second-term housing policy agenda in the same city where he made one of the biggest broken promises of his first term.
Under Obama’s plan, mortgages provided by private-sector lenders that are bundled into securities and sold to investors could obtain a taxpayer guarantee in return for a fee, according to the White House.
The private sector would have to shoulder some of the initial losses if defaults were to rise, a condition usually triggered by falling home prices. After that, taxpayers would absorb the remainder of losses stemming from an extreme downturn in the nation’s property market. The insurance fee collected by the government should be “actuarially-fair,” the White House said, meaning it should equal the expected payout.
Though short on specifics, Obama’s endorsement of such a plan marks a turning point in the ongoing Washington debate over how to reform the nation’s housing finance system. Five years after twin housing giants Fannie Mae and Freddie Mac were rescued by taxpayers, policymakers have struggled to advance a proposal that would ensure continued access to a bedrock of the U.S. housing market -- the fixed-rate 30-year mortgage -- but also would reduce the government’s role in funding home loans.
The White House had avoided publicly weighing in on how to reform Fannie Mae and Freddie Mac. In 2011, the administration outlined three policy options. Though it had quickly narrowed those options to a few core ideas, officials have said, the administration refrained from publicly discussing them out of fear White House involvement would poison discussions on Capitol Hill.
Julia Gordon, director of housing finance and policy at the progressive advocacy organization Center for American Progress, praised Obama’s expected remarks for having the discussion about the future of housing policy in the context of “middle-out economics,” rather than focusing on investors and asset classes. Obama is in the middle of delivering a series of policy speeches discussing ways to improve the economy by emphasizing middle-class households.
Fannie Mae and Freddie Mac own or guarantee nearly half of all outstanding home loans. In the aftermath of the 2008 financial crisis, Fannie Mae, Freddie Mac and the rest of the U.S. government have backstopped more than 90 percent of new home loans. Taxpayers now own or guarantee roughly three of every five outstanding mortgages.
The cost of a taxpayer guarantee could be high, especially if the administration’s preference is for the fees to equal expected payouts. A senior administration official said that the cost of the current system, which helped lead to the financial crisis, was “trillions and trillions of dollars in lost equity that we are still rebuilding.”
If the plan ultimately is signed into law, “credit would be modestly more expensive than it was,” the official said.
Policy analysts reckoned there’s little chance Obama’s plan could make it into law before the 2014 election, despite what appears to be a growing bipartisan consensus on the future of U.S. housing finance.
Taxpayers pumped in nearly $190 billion to save Fannie Mae and Freddie Mac so the companies could continue to make good on guarantees that investors were counting on. Now reporting record profits thanks to conservative lending standards, fewer defaults and rising home prices, the companies have returned more than $130 billion to the U.S. Treasury.
Obama’s plan resembles legislation put forward by a bipartisan group of senators led by Bob Corker (R-Tenn.) and Mark Warner (D-Virginia). The lawmakers call for a public entity that would offer a government guarantee to issuers of mortgage bonds that would guarantee investors against losses. Those issuers would have to have sufficient capital to cover up to 10 percent of losses from defaults, after which taxpayers would step in.
Industry and consumer groups ranging from the Mortgage Bankers Association to the Consumer Federation of America have endorsed key planks of the Corker-Warner proposal.
The senior administration official said the Corker-Warner proposal was “consistent” with Obama’s ideas to reform housing finance, though the official said the proposal fell short in ensuring continued access to credit for first-time home buyers or in providing for rental housing.
Still, a powerful group of House Republicans is trying to advance a proposal that would drastically reduce taxpayer involvement in the housing sector. They remain a roadblock to any deal.
House and Senate Republicans are likely to object to other ideas Obama will attempt to advance on Tuesday, such as a government initiative that would allow more borrowers to refinance their home loans into cheaper, taxpayer-backed mortgages.
The site of Obama’s address on Tuesday is a short distance from the spot where the president announced his signature anti-foreclosure effort at the outset of his presidency. At a high school in the Phoenix suburb of Mesa, Obama explained how his mortgage modification program would work and how many people it would help.
In February 2009, Obama said that up to 4 million homeowners would be able to modify the terms of their mortgages under a government plan that would cap payments to income and prevent foreclosures.
The effort, known as the Home Affordable Modification Program, has fallen far short of its goal.
Sheila Bair, the Republican former head of the Federal Deposit Insurance Corp. who has been praised by consumer advocates and liberal Democrats, wrote in her book after leaving government service that she “cringed” when Obama said he'd save 4 million borrowers from foreclosure.
"At the Phoenix announcement, the president was masterful in announcing the program, though I cringed as he threw out what I considered to be wildly inflated numbers on the programs' impact," Bair wrote. "Even with our own, more aggressive proposal, we had estimated the number of successful modifications at 2.1 million tops."
Bair said many borrowers who entered HAMP ultimately were cheated.
Through May, fewer than 880,000 borrowers were making payments on new HAMP mortgages. Originally a $50 billion commitment, the program has shrunk to about $38 billion. Less than $9 billion has been spent so far on housing programs under the bank bailout program known as TARP.