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What Obama's State of the Union Could Mean for Banks

JAN 27, 2014 12:31pm ET
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President Obama is far removed from his harsh criticism of big banks coming out of the crisis, but his State of the Union speech Tuesday night could still provide a crucial glimpse into the administration's thinking on financial policy issues.

Tuesday's speech is not expected to contain as much attention to banking as when Obama addressed the nation early in his presidency, when financial institutions were reeling. But observers expect at least some mention of housing finance reform as lawmakers continue debate on what system should replace Fannie Mae and Freddie Mac. Commentators said Obama also may use the speech to tout steps his administration has taken to implement financial reform.

"He could potentially take a victory lap on the successful installation of Cordray, and the accomplishments of the bureau getting up to speed in three years and managing a complex operation," said Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center, referring to Richard Cordray and the Consumer Financial Protection Bureau.

In his last two State of the Union speeches, Obama called for greater access to mortgage refinancing for borrowers. In his 2012 address, he proposed a fee on large banks to fund greater refinancing activity, and last year reiterated his support for existing borrowers to be able to tap into new loans. Some observers expect the topic to come up again Tuesday, but it is still unclear how serious the administration is about expanding eligibility for certain federal refinancing programs.

"We expect President Obama to once again mention mortgage refinancing during his State of the Union address...but we continue to believe that the issue of expanding refinancing opportunities is more rhetoric than policy priority at this point in time," Isaac Boltansky, a policy analyst at Compass Point Research & Trading, said in a note to clients on Wednesday.

Others foresaw possible mention of the the housing recovery and continued concerns about borrowers' access to credit, expanding on a recent speech Obama gave in Phoenix on efforts to wind down Fannie Mae and Freddie Mac.

"I would guess at this point that if the president is talking about the strength of economy, he can't avoid talking about how housing played a fundamental role in the recovery," said David Stevens, president and chief executive of the Mortgage Bankers Association.

"Based on previous speeches he's made, like the one in Phoenix, he would also have to point out that the recovery has not been appreciated by all Americans. Some families have been left in the shadow of the housing recovery."

Still, the address will likely not be as focused on banking as earlier speeches during and soon after the crisis, when Obama took tougher positions on the industry.

The speech attracts millions of viewers and is one of the most watched events of a presidency, so any mention of banking issues is likely to be high level. But it does give the White House a chance to update the public—and even try to pat itself on the back—about its progress implementing the 2010 Dodd-Frank Act.

Edward Mills, analyst at FBR Capital Markets, pointed to remarks by Treasury Secretary Jacob Lew last month suggesting that much of the law's implementation is finished.

"Look at where we are five years into the administration," Mills said. "There's the urban legend that Wall Street got away, and it is always good politics for a president to remind folks what was done and to declare some victory. There's plenty of political upside to doing so."

Others said references to financial services issues could be part of a broader message, such as the administration's focus on income inequality and allowing more Americans to benefit from the recovery. This is particularly true given the timing of the speech less than a year before the midterm elections. There, Obama may bring up the CFPB.

"This is going to be about: How do I position my party for the midterms?" said Mark Calabria, director of financial regulation studies at the Cato Institute. "He's going to stay away from things that divide his side of the aisle, and focus on things that unite them and draw a contrast with Republicans.

"Part of the whole economic inequality theme is along the lines that Republicans don't care about the middle class and working class, so part of what connects to that is consumer finance issues,” Calabria said.

The CFPB is also one of the most well-known aspects of the Dodd-Frank law, and discussing its mission and work avoids the complexities of other provisions, like living wills or the government's powers to wind down giant firms.

"If you think about the biggest elements of Dodd-Frank by name recognition, then I think you have to start with the CFPB and the single director," Klein said. "Even the Volcker rule is relatively well known – but maybe not appropriate for the State of the Union address."

Mills said Obama could alternatively use the speech to highlight legislative efforts the White House supports, such as the bipartisan discussions to reform Fannie Mae and Freddie Mac pending in the Senate.

"Anytime the president is out there using the bully pulpit calling for something, it's better than his ignoring the issue," he said.

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