Taxpayer-Backed Fannie And Freddie Ordered To Subsidize Low-Income Housing

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Rachel Stoltzfoos Staff Reporter
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Fannie Mae and Freddie Mac have yet to repay a $188 billion taxpayer bailout, but the Federal Housing and Finance Administration ordered the agencies Thursday to begin diverting some of their profits to low-income housing funds.

Texas Republican Rep. Jeb Hensarling, who chairs the Financial Services Committee, slammed the move. “Director Watt’s decision to activate the Fannie and Freddie slush fund may be an early Christmas present for Acorn-like, liberal housing activists, but it’s a lump of coal in the stocking of every American taxpayer,” he said in a statement Thursday.

A 2008 law ordered Fannie and Freddie to pay a percentage of profits into the Capital Magnet and Housing Trust Funds, but the FHFA suspended payments that same year, because Fannie and Freddie were in such bad financial shape. But in letters to Fannie and Freddie Thursday, FHFA Director Mel Watt revoked the six-year suspension and ordered them to resume paying into the funds.

Hensarling has already urged the FHFA not to revoke the suspension. “We believe that any money diverted from the GSEs to these Funds is money that would otherwise be used to compensate taxpayers for their investment,” he said in an April letter to Watt that was also signed by Republican Reps. Scott Garrett and Ed Royce.

To keep Fannie and Freddie afloat in 2008, the Treasury purchased $188 billion of shares, essentially taking over the companies. They have paid the Treasury about $163 billion in dividends on those shares since 2013, according to Watt’s letters, and will have paid $225 billion in total by the end of 2014, according to The Wall Street Journal.

But they are unable to buy the shares back from the Treasury, so technically they still owe taxpayers $188 billion. And taxpayers are still on the hook for any future collapse, since the government is essentially guaranteeing Fannie and Freddie’s finances.

“Fannie and Freddie can never make amends for the catastrophic damage their failed business model caused our economy — a failed model that is still alive today and must be terminated,” Hensarling said in November.

Since they’re backed by the government, Fannie and Freddie are able to borrow at cheaper rates than other companies, and enjoy a near-monopoly on the mortgage-backed securities market.

“These two entities would not be generating one penny of revenue without taxpayer backing, and until the American taxpayers are taken off the hook for a future bailout, FHFA should continue to suspend payments to these funds,” Tennessee Republican Sen. Bob Corker told The Hill.

Democractic senators Elizabeth Warren, Barbara Boxer, Bernie Sanders, and Jack Reed praised Watt’s decision in a joint statement Thursday, saying it will help millions of families in need. “It will allow more renters to find the homes they need at prices they can afford and will help with economic development initiatives in low income or rural areas,” Reed said.

“Making sure people have access to housing must be a top priority,” Warren added, “and these important funds will provide hundreds of millions of dollars each year to increase the supply of affordable rental housing for families in need.”

Government policy incentivizing banks to issue risky mortgages to low-income families played a role in the collapse of the housing market. Fannie and Freddie, and later other lenders got rid of down payments and other traditional mortgage qualifications so that low-income earners could afford a house.

Those targeted mortgages soon spread to the greater market, and were offered to higher-income earners who were able to purchase even more expensive houses than they could afford. The huge number of risky mortgages contributed to the housing bubble, and eventual collapse of the market.

“Fannie Mae and Freddie Mac were at the epicenter of the 2008 financial crisis that threw millions of Americans out of work and destroyed trillions of dollars of household wealth,” Hensarling said. “The nearly $200 billion bailout of Fannie and Freddie is still the biggest, costliest taxpayer-funded bailout in history, and contrary to what some claim, they have yet to ‘repay’ taxpayers one thin dime.”

Hensarling accused Watts of releasing the letters at the end of the year to avoid oversight and vowed to bring him before the Financial Services Committee to testify next year.

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