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Obama housing plan: from dismantling Fannie Mae to immigration reform

President Barack Obama waves to the crowd assembled at Desert Vista High School as he prepares to give a speech on Aug. 6. (Photo by Evan Wyloge/Arizona Capitol Times)

President Barack Obama waves to the crowd assembled at Desert Vista High School as he prepares to give a speech on Aug. 6. (Photo by Evan Wyloge/Arizona Capitol Times)

The Arizona where President Obama announced an ambitious housing assistance program is much different than the one he visited shortly after taking office in 2009.

Since Obama’s 2009 trip, where he unveiled a program designed to help homeowners who were underwater on their mortgages, housing prices in Arizona have risen and foreclosures have dropped significantly. But the housing situation in Arizona, much like the rest of the country, still has a long way to go.

Speaking to more than 2,000 at Desert Vista High School in Phoenix, Obama laid out a six-point plan that he said will help first-time homebuyers and people who lost out when the bubble burst get home loans, make rental homes more affordable for people who don’t own houses, and ultimately wean American off the government-backed mortgage system that the president faulted with causing the housing crash in the first place.

Obama recalled the 2009 trip, his first to Arizona after becoming president, and said the economy and housing situation in the state have greatly improved since then.

“We’ve made progress, and that’s helped to move the economy forward. But we’ve got to build on that progress. We’re not where we need to be yet. We’ve got to give more hardworking Americans the chance to buy their first home. We have to help more responsible homeowners refinance their mortgages,” Obama said.

The president outlined several major policies that he said would help turn the housing market around:
-Get Congress to pass legislation allowing homeowners to save up to $3,000 a year by refinancing their mortgages at current interest rates.
-Simplify overlapping regulations and cut red tape to make it easier for responsible borrowers to get mortgages.
-Pass immigration reform, which Obama said would boost home ownership and values.
-Tear down vacant properties and repair rundown houses to boost construction industry employment and home values.
-Ensure that families that can’t afford to buy homes have affordable rental housing.
-Dismantle the public-private mortgage lenders Fannie Mae and Freddie Mac to put lending back in the hands of the private sector.

Obama’s remarks were met with both optimism and skepticism, sometimes from the same people. Many liked what they heard, but question whether the programs will work or whether key parts of it can get through a gridlocked Congress. And some planks of Obama’s program were vague, with key details still to be determined.

The president and Democratic allies acknowledged that anything requiring congressional approval will have a tough road ahead. The Republican-controlled U.S. House of Representatives has been a roadblock for much of Obama’s agenda, including his comprehensive immigration reform proposal.

Shaun Donovan, the U.S. Housing and Urban Development secretary, touted the provisions that won’t need congressional approval, a program dubbed “Back to Work.” Donovan told reporters after Obama’s speech that the White House can make mortgages more accessible by changing Federal Housing Administration rules to allow anyone who’s had a clean credit record for at least one year to get a loan.

Donovan said FHA can also make housing counselors available to people who need help dealing with other housing-related issues. And the federal government can encourage private-sector lenders by making sure they know what accountability standards they’ll be held to, while also streamlining regulations that make it difficult for people to get mortgages.

“These are things we can do with our own authority,” Donovan said. “We’re not going to wait for Congress because we can’t wait. Families in Arizona still need help. Even though the housing market has gotten dramatically better, there’s still a ways to go.”

Perhaps the most ambitious part of Obama’s program, which the White House calls A Better Bargain for the Middle Class, is end the public-private model used by Fannie Mae and Freddie Mac. Obama said the business model, in which Fannie Mae and Freddie Mac could make loans with impunity while knowing that their mortgages were backed up by the government, helped inflate the housing bubble that devastated the economy.

“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,” Obama said. “Private capital should take a bigger role in the mortgage market.”

Some housing experts applauded Obama’s call for the elimination of Fannie and Freddie’s business model. Herbert Kaufman, a professor emeritus with Arizona State University’s W.P. Carey School of Business, said he’s been calling for such a move for years.

But Kaufman, a former Fannie Mae economist, warned that the government should proceed cautiously and gradually, assuming it can even get through Congress. Move too quickly, meaning anything less than a decade, and it could cause a major shock to liquidity and mortgage interest rates.

“Fannie and Freddie account for about 75 percent of the mortgage loans (in the U.S.),” Kaufman said. “They need to be weaned slowly, because otherwise it could be catastrophic.”

Michael Orr, director of the Carey school’s Center for Real Estate Theory and Practice, agreed that the federal government should put more mortgages in the hands of the private sector through a long-term dismantling of Fannie and Freddie. But in the short term, Orr said he liked Obama’s proposals on making it easier for people to get loans, as well as finding ways to encourage lenders to give mortgages to responsible borrowers.

While Orr supported the proposal to shift mortgage lending toward the private sector – 80 percent of mortgages processed today pass through government hands, which Orr said is unheard of in most of the world – he lauded Obama’s proposals to make it easier for people to get mortgages, especially first-time borrowers or people who lost their jobs during the recession but have since found new employment.

“There’s just too many obstacles to getting people qualified for a loan, particularly people who are just starting out and don’t have a long credit history,” Orr said. “And I think the lenders are being overcautious. We don’t want them to go back to the bad old days when they’d lend to anybody, but there are too many strange rules that they have.”

Economist Jim Rounds, of the firm Elliott D. Pollack and Company, said he’s wary of any programs in which the government urges homeownership, which he said was partly responsible for causing the housing bubble in the first place. But he said he’d reserve judgment on the effectiveness of Obama’s plan until he saw more details, which were largely lacking in the president’s speech.

“It’s difficult to evaluate until we have more information about the programs,” Rounds said.

Some skepticism among economists and housing experts comes from a belief that the program Obama announced when he visited Arizona in 2009, the Home Affordable Modification Program, did little to help homeowners or boost the housing market. Despite gains in Arizona’s housing market over the past two years, they believe that Obama’s policies had little to do with the improvements.

“Most of those programs have been marginal at best. The original program was not particularly well received, and I think the reason is the mortgage industry, the system is not created to fix problems,” said Mark Stapp, director of the Carey school’s Master of Real Estate Development Program.

Kaufman was skeptical on the short-term effectiveness of the new programs as well.

“They’re going to be effective at the margins. Housing will not, in my view, fully recover until the economy fully recovers,” Kaufman said.

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