What Obama's GSE Speech Means for Housing Finance Reform
"The administration can't sit back any longer," said Brian Gardner, an analyst at Keefe, Bruyette & Woods. "Even if they didn't want to engage, it's not an option for them anymore."
Still, Obama was tactical in his approach, offering broad principles that were largely consistent with the administration's white paper released in 2011 and dovetailed with a bipartisan bill already introduced in the Senate. The paper suggested three possible ways to reform the system, including full privatization of the market and the elimination of any government support.
But Obama made it clear Tuesday he no longer saw that as a viable option, even if he was careful to suggest the government should only have a "limited" role in the system.
"I believe that while our housing system must have a limited government role, 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," Obama said.
Realistically, there is little chance a full privatization plan could pass Congress given that many key players in the housing industry, including the National Association of Realtors, National Association of Home Builders and the financial services community, oppose such a step.
That helps explain why the Senate bill, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., includes an explicit catastrophic government guarantee, even while it would unwind Fannie Mae and Freddie Mac, replacing them with multiple privately owned companies. That bill has gained significant support from the industry and the administration, which has previously endorsed it. Obama said Tuesday that the "good news is that there's a bipartisan group of senators working to end Fannie and Freddie as we know them."
"I support these kinds of efforts," he said.
Obama also went further by specifying that any reform bill should preserve the 30-year fixed-rate mortgage for American families as well as keep housing affordable for first-time homebuyers.
Nearly half of the members of the Senate Banking Committee have signed on as co-sponsors to the Corker-Warner bill. Meanwhile, panel chairman Tim Johnson, D-S.D., and Mike Crapo, D-Idaho, the lead Republican on the committee, have pledged to make fixing the housing finance system a top priority and are said to be working on a plan that will draw heavily from Corker-Warner.
Warner said Tuesday that there is a growing consensus around the issue.
"It's good to see additional momentum to strengthen the economic recovery by addressing mortgage finance reform," the Virginia Democrat said in a statement.
Rep. Maxine Waters, D-Calif., said Democrats "stand ready to work with the president on reforming our nation's finance system in a way that protects homeowners, taxpayers and renters and maintains the affordability of the 30-year fixed-rate mortgage."
The principles in the president's speech aren't new, but mark the first time the Obama administration has been more explicit about which of the three options initially laid out more than two years ago it favors.
"This is the most substantive announcement from the White House since the Treasury white paper," said Edward Mills, a financial policy analyst at FBR Capital Markets and former Hill aide. "It is clear we are getting to the point of settling on an option."
Obama's injection into the debate especially at such an early stage in the reform process is significant, observers said.
The White House is intent on trying to "shape the final debate and play the role the administration has to in bringing something over the finish line," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics.
It's a step forward many observers who have closely watched the mortgage finance debate have long anticipated. "We've been waiting for the administration to say exactly where they are putting their stake in the ground, so it has a level of significance," Gardner said.
By the administration putting a stamp on GSE reform, it also leaves it less vulnerable to criticism of failing to have a plan or endorse an approach. "If Obama were to stay silent or not be behind a policy, it would open criticism of him not having a plan," Mills said.
But it didn't preclude Republicans from criticizing the administration for not addressing the problem sooner.
"The president's failure to address the largest bailout in our history has only emboldened Washington bureaucrats to continue the federal government's domination of the housing finance market," Rep. Scott Garrett, R-N.J., said in a statement.
Garrett is a sponsor of a bill by House Financial Services Chairman Rep. Jeb Hensarling, R-Texas, that would eliminate the government's role in the mortgage market. In a separate statement, Hensarling welcomed the "president to this debate," but said "his speech is still just that—a speech."
Observers suggest it's what the White House does after Obama's speech that will prove how serious the administration is in seeing housing finance reform through. "The bigger clues will be how they engage on the Hill," Gardner said.
During the speech, the president also urged the Senate to confirm Rep. Mel Watt, a House Democratic lawmaker from North Carolina, who has been nominated to lead the Federal Housing Finance Agency.
"Mel's represented the people of North Carolina in Congress for 20 years, and in that time, he worked with banks and borrowers to protect consumers and help responsible lenders provide credit," Obama said. "He's the right person for the job, and Congress should give his nomination an up-or-down vote without any more obstruction or delay."
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