Efforts to unravel housing subsidies that fuelled the financial crash reached a milestone on Tuesday as Barack Obama said the national housing recovery was now strong enough to begin dismantling federal mortgage giants Fannie Mae and Freddie Mac.
In a speech in Phoenix, the epicentre of the housing bubble, the president outlined a series of steps he said could limit the negative impact on home buyers of scrapping these billions of dollars in loan guarantees but insisted there was no alternative if future housing bubbles were to be avoided.
Fannie and Freddie, as the two federally-created entities became known, were blamed for encouraging an era of reckless lending and were bailed out by the US government at a cost of $187bn.
But efforts to reform them since the crash have been hampered by fears about continued weakness in the housing market.
Now the White House argues it is time to work with Congress to replace the system with more private guarantees. “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.
“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.”
Obama is also seeking guarantees that a private sector-led mortgage finance system would still ensure wide homeowner access to popular 30-year mortgages at fixed rates.
Making light of criticism from Republicans who have cast him as a big-spending liberal, Obama joked that his calls for deeper private sector involvement “must sound confusing to the folks who call me a socialist.”
Fannie Mae and Freddie Mac do not make loans directly, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. The enterprises currently own or guarantee half of all US mortgages and back nearly 90% of new ones.
Obama’s trip to Phoenix marked the latest stop on a summertime tour aimed at rallying the public around his economic policies ahead of looming budget fights with congressional Republicans this fall. It was also a return to the city he visited just weeks after taking office in 2009 to tout the government’s role in bolstering the housing market.
The nationwide housing recovery has been providing critical support to the economy at a time when manufacturing and business investment have stagnated. Steady job growth and low mortgage rates in the past year have also fueled more home sales. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher and encouraged builders to start more homes and create more construction jobs.
The Associated Press contributed to this report