Mel Watt, Director of the Federal Housing Finance Agency (FHFA), is facing mounting pressure regarding his decision to lift a temporary suspension on allocating funds to the national Housing Trust Fund (HTF) and Capital Magnet Fund (CMF). With the lifted suspension, 4.2 basis points of each dollar of the unpaid principal balance for new business purchases from Fannie Mae and Freddie Mac will be diverted towards the funds.

Enacted in the summer of 2008, the Housing and Economic Recovery Act of 2008 (HERA) created the HTF and CMF. According to Housing and Urban Development (HUD), HTF “is a new affordable housing production program that will complement existing Federal, state and local efforts to increase and preserve the supply of decent, safe, and sanitary affordable housing.” Extremely low- and very low-income households are eligible for the program. Updated income limits for extremely low- and very low-income households for each county in the U.S. can be found on HUD’s website.

The HTF works by providing funds to eligible state and state-designated entities for activities that include real property acquisition, relocation assistance, demolition, and site improvements. In regards to eligible households, assistance can appear in the form of deferred loan payments, grants, interest subsidies, and equity investments.

Similar to the HTF, the CMF promotes affordable housing but utilizes Community Development Financial Institutions (CDFIs) and non-profit housing developers as the vehicles for creating inexpensive housing options. The CMF can also use funds for community facilities and economic development projects that encourage affordable housing. As a competitive grant program, the CMF is unique in that it was created to increase investments and attract private capital.

Although HERA established the allocation of funds to the HTF and CMF, it was temporarily suspended when the Government-Sponsored Enterprises (GSEs) were placed into conservatorship under the FHFA. The steep financial woes generated by the subprime mortgage crisis led to the eventual conservatorship decision.

Fast-forward to December 2014, Watt wrote a separate letter to the respective CEOs of Freddie Mac and Fannie Mae that explicitly called for the termination of the suspension on allocating funds to the HTF and CMF in order to help bolster affordable housing.

According to 12 U.S.C. § 4567 (b), the suspension was due to allocations violating one or more of the following:

• Contributing or would contribute to the financial instability of Fannie Mae/Freddie Mac.
• Causing or would cause Fannie Mae/Freddie Mac to be classified as undercapitalized.
• Preventing or would prevent Fannie Mae/Freddie Mac from successfully completing a capital restoration plan.

Watt’s decision and his reasoning is the epicenter for the arguments of both proponents and opponents. In his letters to Freddie Mac and Fannie Mae, Watt used four main reasons to support his decision which is summarized below:

• The decision to temporarily suspend allocations was a product of the circumstances at the time. Currently, those circumstances have changed.
• Financial operations have stabilized to a reasonable level. In addition, allocations and set aside would not be a contributing factor to financial instability of the GSEs in question.
• 12 U.S.C. § 4567 (b)(2) and (3) are no longer applicable. These sections refer to the classification as undercapitalized and the successful completion of a capital restoration plan. Currently, the capital classifications are suspended under the FHFA and the GSEs in question are not seeking to complete a capital restoration plan. Both GSEs have entered into Senior Preferred Stock Purchase Agreements (SPSPA) to avoid receivership.
• Since 2012, the GSEs have not endured profit levels that are anticipated to be sustainable. However, projections reveal that they will maintain profitability in the future. The decision to resume allocating funds can always be reversed or updated based upon the financial situation.

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