Homeownership Mission Vulnerable After Rescue

By Binyamin Appelbaum and Renae Merle
Washington Post Staff Writers
Wednesday, September 10, 2008

The suspension of Fannie Mae and Freddie Mac as private enterprises means the federal government can no longer require them to spend shareholders' money on affordable-housing programs. Now the government must decide how much of its own money to spend.

Some checks are already being written. The Treasury Department last week began issuing millions of dollars in "Hope bonds" to fund refinance loans for homeowners facing foreclosure. Fannie Mae and Freddie Mac were supposed to pick up the tab. Now it's on the government.

Some spending decisions are reversible. Congress this summer created an affordable-housing trust fund, to be filled with money from Fannie Mae and Freddie Mac beginning in 2010. Affordable-housing advocates, who fought for years to create the fund, now wonder when it will see the first dollar of funding.

But the overarching question is about the future of the companies' founding purpose and long-standing mission to promote homeownership for lower-income families.

Regulators have made clear that they see Fannie Mae and Freddie Mac as essential to the health of the whole mortgage market, not just the lower end. James B. Lockhart III, director of the Federal Housing Finance Agency, barely mentioned affordable housing Sunday as he described an eight-point plan for the companies. Instead, he chose to underscore a broader mission: "the critical importance each company has in supporting the residential mortgage market in this country."

That has affordable-housing advocates wondering whether affordable housing will be seen as an expendable luxury in a drive to restore the two companies to profitability as soon as possible.

"Our concern is that the rhetoric has been about preserving the global financial system," said Mike Shea, executive director of Acorn Housing. "There has not been a whole lot of rhetoric about preserving homeownership."

Fannie Mae and Freddie Mac were created by the federal government to make mortgage loans less expensive and more available. They enjoyed indirect financial support from the government in exchange for focusing their efforts on making mortgages affordable for lower-income families.

As they became highly profitable, they felt increased pressure from Congress to invest directly in affordable housing. The resulting programs include the classic philanthropy of grants to community groups and the complicated wizardry of low-cost financing for apartment construction projects.

Two of the companies' largest obligations were created this summer by the same legislation that gave the government the power to take them over. When the government assumed control of the firms, it also took over the obligations.

The more immediate of the two obligations arises from a deal the government struck with lenders: If you, the lenders, agree to write new mortgage loans for borrowers reflecting the current value of their homes, we, the government, will promise to repay those loans even if the borrower cannot. Fannie Mae and Freddie Mac were going to cover the cost.

The government said it would guarantee up to $300 billion in such refinance loans over the next three years. The Congressional Budget Office estimated the cost of the program at about $729 million.

Beginning next year, Fannie Mae and Freddie Mac were to have paid the government 4.2 cents every time they bought $100 in new loans. The government could still collect those fees, but now that's just bookkeeping. Fannie Mae and Freddie Mac are on the government's tab.

A spokesman for the Department of Housing and Urban Development, which will administer the refinancing program, said the department was committed to starting the program Oct. 1.

The second obligation is an affordable-housing trust fund, a pot of money long sought by housing advocates that will be distributed to states to support the creation and preservation of low-cost housing.

The money was to come from the 4.2-cent fee: As the refinancing program winds down, funding would be diverted to the housing trust fund, beginning in 2010. Advocates say they think Fannie Mae and Freddie Mac will be back on solid ground before then but are also eager for Congress to designate other sources of funding.

"We're optimistic," said Sheila Crowley, president of the National Low Income Housing Coalition. She cited the strong support of Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, for the trust fund. Frank's office acknowledged that support but noted that Lockhart has the power to suspend contributions in the financial interest of the companies.

Some advocates see reason for concern about the administration's intentions. They note the decision by regulators in April not to punish Fannie Mae and Freddie Mac for failing to meet their affordable-housing goals in 2007.

The companies' regulator at the time, the Department of Housing and Urban Development, accepted the companies' argument that they were ailing financially and therefore unable to meet the goals. The advocates worry the government will put the companies' financial health ahead of policy goals.

But a vocal part of the affordable-housing community has long criticized the two companies for failing to support affordable-housing programs. They note that Fannie Mae and Freddie Mac chose to invest in subprime mortgages -- loans that often allowed people to buy homes they could not afford -- rather than truly affordable mortgages.

"They have not really done affordable housing. That's been the problem," said Judith Kennedy, chief executive of the National Association of Affordable Housing Lenders. "If they had done legitimate affordable housing, they wouldn't be in this mess."

Other advocates see the takeover as an opportunity for Fannie Mae and Freddie Mac to push a systematic restructuring of loans for distressed homeowners. It could be an opportunity for Fannie Mae and Freddie Mac to set an example, said Bruce Marks, chief executive of the Neighborhood Assistance Corp. of America. "That means [Treasury Secretary Henry] Paulson doesn't need to be begging servicers to restructure. Now we can do it through Fannie and Freddie, and that will become the national standard," Marks said.

The companies have funded nonprofit groups, something an arm of the government may be less likely to do.

NACA received $3 million from Fannie Mae last year and $500,000 from Freddie Mac, helping the Boston-based nonprofit hire more housing counselors. Consumer Credit Counseling Service of Greater Atlanta received a $250,000 grant from Fannie Mae this year for outreach efforts after noting that a disproportionate number of Hispanic homeowners were facing foreclosure.

The issue is a particular concern for the District because Fannie Mae is headquartered here and has long focused its affordable-housing efforts on its home town. Now the concern is that the District has lost its largest Fortune 500 company, replaced by one more federal agency.

"We do not have many sources to make up for what Fannie Mae has done here," said Del. Eleanor Holmes Norton (D-D.C.). "We are not a corporate headquarters city, to say the very least."

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