Obama’s Speech Raises Hopes of Advocates of Mortgage Finance Overhaul

The president’s State of the Union address on Tuesday provided a glimmer of hope for those looking for action to revamp America’s mortgage system.

In a brief nod in the address, and in an elaboration of his proposals posted on the White House’s website, President Obama reiterated his commitment to fixing the system’s problems, albeit at the end of a long list of executive actions that focused on job creation, immigration reform and other domestic issues.

“Since the most important investment many families make is their home,” Mr. Obama said on Tuesday night, “send me legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of home ownership alive for future generations.”

The White House document further outlined a plan to end the business model of the mortgage finance giants Fannie Mae and Freddie Mac and ensure widespread access to mortgages. “The president has made clear that it is time to turn the page on an era of reckless lending and taxpayer bailouts, and build a new housing finance system that will provide secure home ownership for responsible middle class families and those striving to join them,” the document said.

Mr. Obama’s housing pledges are not exactly new - he has been calling for an overhaul of Fannie Mae and Freddie Mac for years. But some listeners are hopeful that the comments do more than just repeat old rhetoric.

“There’s nothing substantively new, but what it does do is that it does provide a call to action, it does push to make this a timely issue,” said Alison Hawkins, the vice president of communications at the Financial Services Roundtable, a banking and insurance industry trade group. “The sense on the Hill is that if this doesn’t move soon, it’s really not going to move.”

Fannie and Freddie process the majority of all private-sector loans. Mr. Obama’s proposal mentioned legislation created by Senators Bob Corker and Mark Warner, which outlines a plan to unwind the two organizations. The bill includes provisions to establish a Federal Mortgage Insurance Corporation, which would act as a government backstop for private-sector loans. Think Federal Deposit Insurance Corporation, but for mortgages.

The proposal also refers to Senators Tim Johnson and Mike Crapo, who are working on a bill to overhaul the Federal Housing Administration, which is involved in about a quarter of all mortgages. Ms. Hawkins said she hoped that meant that final legislation was on the way.

“The word on the street is that they are working on it, but nobody has actually seen the legislation yet,” Ms. Hawkins said.

Fannie and Freddie participate in the secondary mortgage market, which means they don’t actually make loans to prospective home buyers. Instead, they buy up mortgages other lenders have made, or buy and sell securities made up of mortgages that have been bundled together. That means that banks lending directly to consumers have a way to get those loans off their books. Theoretically, that frees up more money that can be used to make more loans.

Ending Fannie and Freddie poses a number of challenges. One of the biggest is whether the private sector can rebuild that secondary market on its own. The White House, therefore, faces a delicate balancing act in trying to shift its role in the mortgage market without destabilizing it.

“There’s one view that says the secondary mortgage market would not be able to recreate itself without some government entity” like the Federal Mortgage Insurance Corporation “being there as a backstop,” said Lawrence White, an economics professor at New York University’s Stern School of Business. “The House view is, let’s just get Fannie and Freddie out of there and the mortgage markets will take care of themselves just fine.”

Mr. Obama isn’t just concerned with Americans’ ability to buy homes. The need for affordable rental housing for the middle class was tucked at the very end of his proposal on housing.

“I think that’s terrifically important,” Professor White said. “Rental housing is often the forgotten element of a lot of rhetoric about housing. Even in the president’s speech last night, it was about the American dream, which is supposedly home ownership, but surely if we have learned anything over these past five, eight years, it’s that home ownership is not for everybody.”