President Obama’s View of Fan and Fred in August 2013

During a speech in Phoenix in August 2013, President Obama made comments on Fannie and Freddie.  The remarks appear misguided.  Let’s hope the President has received better council in the last 1.5 years on what actually caused the financial crisis.

Those who fail to learn from history are doomed to repeat it.

President Obama:  “But — and this is the last key point I want to make — as home prices rise, we can’t just re-inflate another housing bubble. I hope everybody here in Arizona learned some hard lessons from what happened. Housing prices generally don’t just keep on going up forever at the kind of pace it was going up. It was crazy. So what we want to do is something stable and steady. And that’s why I want to lay a rock-solid foundation to make sure the kind of crisis we went through never happens again. We’ve got to make sure it doesn’t happen again.

And one of the key things to make sure it doesn’t happen again is to wind down these companies that are not really government, but not really private sector — they’re known as Freddie Mac and Fannie Mae. For too long, these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong. And along with what happened on Wall Street, it helped to inflate this bubble in a way that ultimately killed Main Street.

So the good news is, right now there’s a bipartisan group of senators working to end Fannie and Freddie as we know them. And I support these kinds of reform efforts. And they’re following four core principles for what I believe this reform should look like.

First, private capital should take a bigger role in the mortgage market. I know that sounds confusing to folks who call me a socialist — I think I saw some posters there on the way in.  But I actually believe in the free market. And just like the health care law that we put in place, Obamacare which, by the way, if you don’t have health insurance or you’re buying it at exorbitant rates on the individual market, starting on October 1st, you can join a marketplace and be part of a pool that gives you much lower premiums, saves you a lot of money.

But in the same way that what we did with health care was to set up clear rules for insurance companies to protect consumers, make it more affordable, but still built on the private marketplace, I believe that our housing system should operate where there’s a limited government role and private lending should be the backbone of the housing market. And that includes, by the way, community-based lenders who view their borrowers not as a number, but as a neighbor. So that’s one principle.

A second principle is we can’t leave taxpayers on the hook for irresponsibility or bad decisions by some of these lenders or Fannie Mae or Freddie Mac. We’ve got to encourage the pursuit of profit, but the era of expecting a bailout after you pursue your profit and you don’t manage your risk well — well, that puts the whole country at risk. And we’re ending those days. We’re not going to do that anymore.

The third principle is we should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage. That’s something families should be able to rely on when they’re making the most important purchase of their lives.

Number four, we’ve got to keep housing affordable for first-time homebuyers — like all these young people. When they’re ready to buy a house, we’ve got to make sure it’s affordable. Families who are working to climb their way into the middle class, we’ve got to do what we can to make housing affordable. And that means we’ve got to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents to buy a home, and it preserves those rungs on the ladder of opportunity.”

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