President Obama recently made a speech in Phoenix to present his goals for making home ownership more available to the middle class in the wake of the financial crisis. It included a five step plan that would make home ownership easier, which was followed by four core principles upon which reforms to Fannie Mae and Freddie Mac should be based. The president’s remarks were lauded by the National Association of REALTORS® as “mirroring” an outline they presented for reforming the secondary mortgage market.
The president prefaced his remarks by explaining the importance of home ownership and how―while his plan involves reducing the role of government―government should still play a role by using his grandfather’s experience as an example.
“After my grandfather served in World War II, this country gave him the chance to go to college on the GI Bill, and buy his first home with a loan from the FHA,” Mr. Obama said. “To him, and to generations of Americans before and since, a home was more than just a house. A home was a source of pride and security. It was a place to raise children, put down roots, and build up savings for college, or a business, or retirement. And buying a home required responsibility on everyone’s part – banks were supposed to give you a fair deal, with terms you could understand, and buyers were supposed to live within their means. In my grandfather’s America, houses weren’t for flipping – they were for living in. “
The five step plan that the president explained in his speech involved allowing homeowners to refinance their mortgages at today’s rates, making it easier for qualified home buyers to buy a home, passing immigration reform because of a study that demonstrates that it contributes to housing demand, rebuilding communities by putting construction workers back to work fixing run down homes and tearing down vacant properties, and investing in rental properties to make housing more affordable to those who aren’t ready for home ownership.
Mr. Obama followed his five step plan with what he called four core principles to reform Fannie Mae and Freddie Mac―the agencies that buy loans, package them as mortgage-backed-securities that they insure against default, and sell them to investors. Because Fannie and Freddie own about half of all mortgages, this puts tax payers at risk for another bailout of these agencies.
In his speech, the president alluded to a bi-partisan senate reform bill known as “Housing Finance Reform and Taxpayer Protection Act”, which winds down Fannie Mae and Freddie Mac. The Republican-controlled House of Representatives passed an alternative that would liquidate Fannie and Freddie, which some believe would lead to the elimination of the 30-year fixed rate mortgage because, according to Reuters and other media outlets, “banks would be reluctant to lend funds for such a long period without some sort of backstop.”
The first core principle the president cited was less of a government role in the mortgage market. He said that private banks should play a bigger role in the mortgage market. In doing so, he urged a larger role of community-based banks rather than the big banks when he said, “private lending should be the backbone of the housing market, including community-based lenders who view their borrowers not as a number, but as a neighbor.”
The second core principle was the notion that the taxpayers should be put in a position to foot the bill for the mistakes of the financial system.
“We encourage the pursuit of profit – but the era of expecting a bailout after your pursuit of profit puts the whole country at risk is over,” Mr. Obama said.
The president’s third core principle of reforming Fannie Mae and Freddie Mac was preserving the 30-year-fixed mortgage.
Finally, the fourth core principal cited by the president was to keep housing affordable for first-time homebuyers and for those working to join the middle-class.
“We need to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents, and preserves that rung on the ladder of opportunity,” Mr. Obama said. “And we need to support affordable rental housing and keep up our fight against homelessness.”
The National Association of REALTORS® said that the president’s remarks were aligned with their own recommendations for reforming Fannie and Freddie.
“President Obama today outlined key principles of comprehensive housing finance reform during a speech in Phoenix,” NAR President Gary Thomas said in a statement posted on Realtor.org. “These principles closely mirror the outline presented by the National Association of Realtors® to the administration in early 2011. NAR believes these principles will contribute to the long-term stability of our nation’s housing market and provide consumers with access to affordable mortgage credit, even during economic downturns.”
While the president’s remarks are all well and good, the bigger problem to the housing market is Congress. The fact that Congress continues to manufacture economic crisis after economic crisis as a result of partisan gridlock―and with some of the lowest approval ratings ever recorded―there isn’t much confidence that any constructive reforms will take effect.
If you are planning on buying or selling a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129.