What Does the Fannie-Freddie Takeover Mean for Affordable Housing?

An APA Policy Analysis

The companies Fannie Mae and Freddie Mac were created in 1939 and 1970 to foster wider homeownership, and they now manage roughly half of the nation's outstanding mortgages. The work of these two private institutions was backed by the federal government, giving the "government sponsored enterprises" (GSEs) a unique role and position in the housing market. On September 7, 2008 — when riskier mortgages threatened to diminish their capital to the point of alarming investors — federal regulators took over management of the two companies.

Many have been left wondering about how the government takeover will affect the already unsteady housing market. While home prices continue to fall, banks are being discouraged from giving loans that cannot be sold on the secondary market for mortgages resulting in fewer buyers qualifying for financing. Currently, the number of available homes across the country is far outpacing the number of buyers, with many more homes expected to hit the market as foreclosure rates continue rise.

Earlier this year Congress passed a broad reform of the GSEs, including changes in oversight structure and the limit on the types of mortgages in which the two institutions may invest. While recognizing that the GSEs played a role in the mortgage crisis, many on Capitol Hill believed Fannie and Freddie would play a key part in bolstering the housing market and promoting affordable housing.

One of the largest issues of concern is the uncertainty of the National Housing Trust Fund. Originally created in the recent energy legislation passed by Congress and signed into law in summer 2008, the Housing Trust Fund was a legislative goal of APA. It provides a permanent, dedicated source of funding for housing assistance and is not subject to the appropriations process. Funds would be directed largely toward the creation, rehabilitation, and operation of rental housing for extremely low-income households. Unfortunately, the initial source of capital as outlined by Congress was annual contributions from Fannie Mae and Freddie Mac, based on a percentage of their new business. Reports on the situation have noted that the new regulator of the two companies has the ability to suspend contributions under certain circumstances, including fiscal distress. However, the fund is not scheduled to receive any contributions from Fannie or Freddie until 2010, at which time many are hopeful that the mortgage giants will have sufficiently recovered. In the meantime, legislators and housing groups have been working quickly to identify an alternate source of funding for the trust fund.

Another potential setback to affordable housing: With the takeover, Fannie and Freddie are no longer required to meet a threshold of low-income mortgages. Advocates of the Housing Trust Fund and other programs have speculated that in the rush to stabilize the market as a whole, and to make the companies profitable as quickly as possible, affordable housing may be pushed aside. Last year, when both companies failed to meet their goals of affordable housing, the Department of Housing and Urban Development declined to fine them, citing their claims that they were struggling financially. If ongoing questions remain about the companies' financial health, affordable housing may be deemphasized for the foreseeable future.

The future of the government-sponsored enterprises, and the likely new direction of federal housing policy in the wake of the near-collapse of the mortgage and financial markets, will be addressed during the upcoming APA Federal Policy & Program Briefing in Washington, D.C., October 19-20, 2008. Come hear the latest news and learn how the changes are likely to affect your community.