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November 20, 2013

Why are Fannie and Freddie funding advocacy?

By and

Fannie Mae and Freddie Mac have been in federal conservatorship since 2008. Should these government-sponsored housing enterprises — essentially broke — still be required to spend taxpayer money to fund activities of housing advocacy groups?

Five years ago, Congress left this question unanswered, but Ed DeMarco, the acting head of the enterprises’ regulator, took the sensible step of stopping the payments.

In a sane world, preventing insolvent enterprises from spending money they don’t have on political “trust funds” is a no-brainer. Yet, housing advocacy groups are campaigning to have their taxpayer-funded spigot turned on and enshrined in new legislation.

For years, affordable-housing groups have funded their programs using a combination of state and local trust funds, federal block grants, and donations from the housing enterprises. Many of the federal grants have come through the Department of Housing and Urban Development, which allocates approximately $2 billion annually to states and more than 600 localities nationwide.

In contrast to this direct source of federal money, state and local trust funds draw on a variety of dedicated revenue sources, such as local real estate taxes, bonds and fees. It has been a longtime goal of housing groups to get a national housing trust fund which guarantees federal tax dollars each year.

These funds have been used to provide a wide range of services, from negotiating with banks to loosen underwriting standards, to providing direct subsidies to real estate developers. These activities — as well as most anything that purports to assist low-income areas — are sure to increase with a national housing trust fund.

And current law already provides housing advocates with what they want. The 2008 Housing and Economic Recovery Act created the national Housing Trust Fund and the Capital Magnet Fund.

If the funds had been operating in 2010, when the housing enterprises bought $856 billion in new mortgages, then $360 million (0.042 percent) would have gone into the funds (65 percent to the Housing Trust Fund and 35 percent to the Capital Magnet Fund).

The recovery act gave the HUD secretary some latitude to determine which states would receive money from the trust fund, but the treasury secretary was given the authority to distribute grants from the magnet fund directly to specific nonprofits.

Luckily for U.S. taxpayers, the Housing and Economic Recovery Act also gave the director of the Federal Housing Finance Agency the authority to delay contributions to these funds. When the housing enterprises were deemed insolvent and placed into conservatorship under the FHFA in 2008, the acting director, Ed DeMarco, suspended the allocations.

But advocacy groups quickly started calling for a new director. They’ve even filed suit claiming that Mr. DeMarco is in violation of the law because he has not yet allocated the funds.

As a hedge, trust fund proponents have made sure that a new Senate proposal contains language to expand the two trust funds. S. 1217, sponsored by Sens. Bob Corker, Tennessee Republican, and Mark R. Warner, Virginia Democrat, shifts the allocation of these funds to a newly created government agency that would replace Fannie Mae and Freddie Mac. The new agency is called the Federal Mortgage Insurance Corp., and the bill would increase the trust fund tax in two ways.

First, it would increase the tax rate to between 5 and 10 basis points (up from 4.2 basis points). Second, it would apply the tax to a larger base of money — the outstanding principal balance of eligible mortgages used by the Federal Mortgage Insurance Corp. This device ensures the trust fund allocations will automatically grow each year unless the agency stops operating.

The end result will be even more money doled out as block grants for programs that are difficult to monitor and nearly impossible to properly evaluate.

Mr. DeMarco should be praised for keeping the spigot to the housing trust funds turned off while the government-sponsored housing enterprises are in conservatorship. Rather than expand these funds by taking even more money from taxpayers, perhaps it is time to question their effectiveness.

 - Norbert Michel is the Heritage Foundation’s research fellow in financial regulations.

 - John L. Ligon is a senior policy analyst in Heritage’s Center for Data Analysis.

Originally appeared in The Washington Times.

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