The government’s top housing finance regulator set up a fight with House Republicans for early next year as he raised the political stakes surrounding mortgage buyers Fannie Mae and Freddie Mac.
Federal Housing Finance Agency Director Mel Watt pleased affordable-housing advocates last week by directing the bailed-out mortgage businesses to begin contributing to special housing.
But the move also capped off a first year in office for the Obama-appointed Watt that has left many conservatives afraid and angry at the possibility that he is leading Fannie and Freddie back down the path toward failure, just six years after the companies crashed and required a nearly $200 billion bailout.
“He’s done a 180-degree turn, he’s got Fannie and Freddie back on the same track they got on in 1993,” said Ed Pinto, a housing analyst at the conservative American Enterprise Institute. The decisions made then took a long time to “metastasize into the disaster that occurred in ’07 and ’08, but we’re starting out on that same path again,” Pinto said.
Watt’s latest move will mandate that Fannie and Freddie shunt 0.042 percent of the total value of the home loans they purchase into two funds set aside to promote affordable housing. That could total hundreds of millions of dollars annually.
GOP House Financial Services Committee Chairman Jeb Hensarling immediately announced that he would call a hearing in January to question Watt’s decision, highlighting the partisan divide over affordable housing.
The trust funds were set up, after years of lobbying by housing groups, by the same 2008 law that created the FHFA. But following the bailouts of Fannie and Freddie, Watt’s predecessor stopped the contributions before they could start. Democrats and housing groups expected Watt, an Obama nominee, to reverse that decision, which he did.
Some of those funds will go to the Housing Trust Fund, which will give them to the states through block grants. The states will then write grants for developers to build housing, mostly rental, to low-income families.
“The idea is that you get a pot of money that you have to figure out how to do something with,” said Sheila Crowley, president and CEO of the National Low Income Housing Coalition. The grants will allow developers to bid on the best ways to create affordable housing, rather than it being a top-down process.
Other contributions will go to the Capital Magnet Fund, which gives grants to nonprofit developers to increase private investment in affordable housing.
Unlike other forms of government spending, money spent through the trust funds cannot be undone by congressional appropriators. “The beauty of having a dedicated source of revenue is that Congress has to affirmatively undo it,” Crowley said.
That feature has conservatives worried that they are “slush funds” for liberal-leaning housing groups, however, and outraged that the funds are being replenished with Fannie and Freddie still in the government’s possession.
“It is beyond irresponsible to restart these affordable housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac,” said Sen. Bob Corker, R-Tenn.
“The problem is they’re dispersing money through third parties, that ends up being very political,” Pinto said.
Affordable housing advocates deny that the block grants and competitive grants go to favored constituencies.
But Watt’s decision is just one of many actions he has taken so that borrowers don’t have to have perfect credit to get a loan, which Republicans have called irresponsible or political.
Watt began his tenure by canceling an increase in the fees charged for the government-backed insurance for the mortgage-backed securities that Fannie and Freddie sell to investors. Later, he upped the annual goals for loans to low-income families. He also announced that the government-sponsored enterprises would begin buying home loans with down payments as low as 3 percent, provided that the borrowers otherwise demonstrated an ability to repay the loans.
Two House Republicans critical of the government’s involvement in Fannie and Freddie sent a letter to Watt warning that recent actions by the two are “concerning.”
Reps. Scott Garrett of New Jersey and Sean Duffy of Wisconsin, both subcommittee chairmen on the House Financial Services Committee, raised questions about leaked Fannie and Freddie memos about the potential negative impact of a Senate bill to end them that surfaced shortly before a vote. They also noted that the two government-sponsored enterprises have representatives in trade associations.
“If these activities are paired with the GSEs’ lengthy history of political activities, they suggest a deeply concerning trend that contradicts the purpose of the long-held prohibition on political activities,” the congressmen wrote, referring to Fannie and Freddie’s pre-crisis lobbying efforts.
