President Barack Obama has outlined a plan to overhaul the U.S. housing finance system, help more homeowners refinance their mortgages and make it easier for some homebuyers to get access to mortgages.
Obama wants to wind down the two mortgage giants that own or guarantee about half of mortgages: Fannie Mae and Freddie Mac. While the government must continue to support the housing system and will continue to play a role in funding home loans, private lending "should be the backbone of the housing market," Obama said during a speech in Phoenix.
Lenders won, taxpayers lost
"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," he says. "'It was 'heads we win, tails you lose.' And it was wrong."
After the financial crisis, Fannie and Freddie went into receivership and the government rescued the companies with a $187 billion taxpayer-funded bailout.
"The era of expecting a bailout after your pursuit of profit puts the whole country at risk is over," Obama says.
The Obama administration says the business model of the two entities must be changed so private investors are on the hook for losses on bad loans. Legislation to reform the mortgage giants must also ensure that homeowners continue to have access to 30-year fixed-rate mortgages.
Is the housing market ready for changes?
Many consumer advocates support the president's view.
"We've been waiting a long time for the president to weigh in, and we cannot be more pleased," says Julia Gordon, director of housing and finance policy at the Center for American Progress.
If done right, the reform of Fannie and Freddie could help the housing market, she says.
"Right now there's so much uncertainty that is keeping (private) investors out of the (mortgage) market," she says.
The president's speech should be a "wake-up call to others in Washington about the urgent need to put in place a finance system to house current and future generations," says Roberto Quercia, a professor and director of the UNC Center for Community Capital at the University of North Carolina at Chapel Hill.
"I am encouraged by the president’s remarks, as they bring attention back to the unfinished business of housing," Quercia says.
But these changes won't happen overnight, or at least not until Congress agrees on a plan.
A plan for refinancers and homebuyers
Some of the ideas proposed by Obama aren’t necessarily new, but if approved, many underwater borrowers would be able to refinance their loans.
The Obama administration is once again calling for a government-sponsored plan that would allow borrowers with loans that are privately owned to refinance their loans even if they owe more than their homes are worth.
Even though mortgage rates are rising, the move isn’t too late yet.
"It's especially not too late for people with private-label mortgages who are underwater and haven't been able to refinance," Gordon says. "Some of them are still stuck with 6 (percent) or 7 percent mortgages."
Among several ideas aimed at helping homebuyers, the Obama administration says the FHA is working on an initiative that will help borrowers regain access to FHA mortgages. The program would help buyers who went through financial difficulties due to job loss and who have found jobs again.
"Now that we've made it harder for reckless buyers to buy homes they can't afford, let's make it easier for qualified buyers to buy homes they can," Obama says. "We should simplify overlapping regulations and cut red tape for responsible families who want to get a mortgage, but who keep getting rejected by banks. And we should give well-qualified Americans who lost their jobs during the crisis a fair chance to get a loan if they've worked hard to repair their credit."
What do you think of the president's proposals?
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