Obama pitches mortgage overhaul

President Obama on Tuesday proposed replacing the nation's mortgage guarantee system with one that relies more heavily on the private sector, while still keeping the government involved. The plan follows the lead of bipartisan proposals moving through Congress that are intended to prevent the same mess created when the old system -- anchored by federal entities Fannie Mae and Freddie Mac -- imploded in 2008.

Fannie and Freddie back more than 80 percent of mortgages in the U.S., which Obama said is "unsustainable." The government bailed out Fannie and Freddie in 2008, at a cost of nearly $200 billion to taxpayers -- which is only now beginning to be repaid.  

Obama offered his plan Tuesday afternoon at Desert Vista High School in Phoenix, an area hard hit by the nation's housing bubble burst. Touting housing gains such as $2.8 trillion in new home equity, the president spoke of ways to preserve what he described as "the most tangible cornerstone at the heart of middle-class life" and expressed the need to wind down Fannie and Freddie's role in the mortgage market.

Speaking to a crowd of roughly 2,200, Obama said that an overhaul of the mortage industry has to include extending mortgages to those who qualify but who have repeatedly been denied by wary creditors.

"We should simplify overlapping regulations and cut red tape for responsible families who want to get a mortgage," Obama said. "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."

He added that homeowners also need the flexibility to refinance their homes while interest rates are low – which could save them $3,000 a year, according to the White House. Mortgage rules, however, have made that difficult, especially for families whose homes are worth less than the amount of the mortgage.

Obama's proposal would set up a new federal insurance where – unlike with Fannie Mae and Freddie Mac – mortgage lenders would have to pay premiums for federal coverage. And the private money of those lenders would have to be wiped out before federal dollars would be available. The system would be akin to Federal Deposit Insurance Corporation coverage for banks.

Judy Kennedy, president of the National Association of Affordable Housing Lenders, said she was surprised to see how close Obama's proposal was to Republican legislation moving through the House and a bipartisan bill in the Senate.

A bipartisan Senate bill pushed by senators Mark Warner (D-Va.), and Bob Corker (R-Tenn.), has offered a measure with what would be called a Federal Mortgage Insurance Corporation. The House Financial Services Committee has already passed similar legislation by Chairman Jeb Hensarling.

"It's good to see additional momentum to strengthen the economic recovery by addressing mortgage finance reform," Warner said.

Working out the details on how to craft a new system of mortgage guarantees, however, would likely face a long slog on Capitol Hill -- though virtually all parties agree on the need to scale back the influence of Fannie and Freddie.

"They have been failures," said James Gattuso, senior fellow for regulatory policy at the conservative Heritage Foundation. "As a nation we really have learned our lesson."

Still, while Obama agreed that the two lending giants should have a lesser role in the mortgage market, he also said that the government should work to ensure that Americans continue to have access to 30-year mortgages at fixed interest rates. But it would be difficult to reduce the mortgage market's dependence on Fannie and Freddie while also maintaining those 30-year mortgages that the government guarantees help provide.

And despite the similarities between Obama's plan and congressional proposals, his overhaul would still likely run into trouble because so many lobbying interests are involved, Gattuso said.

Gattuso and other conservatives would prefer to have no federal backing. "The government guarantee unnecessarily puts taxpayer money at risk and ends up destroying the housing market," Gattuso said. "It encourages risk taking that may not be appropriate.”

But advocates for government backing say it is necessary to keep mortgages affordable and accessible. And the Obama administration -- his latest speech included -- has continued to stress that homeownership is an essential method of wealth accumulation, especially for middle-class Americans.

"It's pretty simple: When more people buy homes, and play by the rules, home values go up for everybody," Obama said.

Another part of Obama's proposal would offer "targeted support to help ensure access to affordable and sustainable mortgage products for low-wealth, first-time homebuyers, and borrowers in historically underserved communities."

Also Tuesday, the Justice Department announced the filing of a federal civil suit against Bank of America that accuses the company of lying to investors about the risk related to mortgage loan-backed securities. Investors will lose more than $100 million from the bonds, according to the DOJ.

"As this action proves, President Obama's Financial Fraud Enforcement Task Force will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential mortgage-backed securities market," Attorney General Holder said.