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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.
Given the current conservatorship that remains in effect, people have expressed widespread concern regarding Watt’s decision. Some believe that his decision will set the U.S. on the path for another major crash, dubbing it “Crash 2.0.” Others believe that, in the hands of housing groups, the funds will be used 
with ulterior motives such as contributing to reckless home loans or lobbying; they have been referred to as “slush funds.” One opponent of the decision has felt provoked enough to author legislation to counteract the decision.
U.S. Representative Ed Royce (R-CA) displayed his disappointment in December when the decision was first announced, and authored the Pay Back the Taxpayers Act of 2014. According to Rep. Royce, who is also a senior member of the House Financial Services Committee, the act would “prohibit contributions by Fannie Mae and Freddie Mac to the Housing Trust Fund and the Capital Market Fund while the institutions are in conservatorship or receivership.”
On the day of the December 2014 announcement, Rep. Royce stated, “Contrary to what Fannie and Freddie apologists claim, the GSEs have yet to repay any of the taxpayer-funded bailout funds they received, which makes today’s announcement by the FHFA outrageous. Money coming in from the GSEs should go to the taxpayers instead of a slush fund for ideological housing groups to play around with.”
The 2014 bill that Rep. Royce authored was not enacted. However, that has not deterred him. He recently created the revamped Pay Back the Taxpayers Act of 2015 which restricts the GSEs from allocating funds to the HTF while they are in conservatorship or receivership. But regardless of conservatorship and receivership status, the bill will restrict the GSEs from redirecting funds to the HTF and CMF as it pertains to the FHFA’s interpretation of HERA.
Opposition was revitalized once again when Watt testified before the House Financial Services Committee in late January 2015. The consensus among opponents remained clear: the FHFA’s recent decisions could lead the U.S. into risky territory that may result in another crash. However, some members of the Committee cited other reasons that could fuel a crash. These reasons include the GSEs’ recent announcement of three percent down payments and the prevention of risk-based guarantee-fee pricing.
But with opposition comes a host of proponents. The crux of a critical supporting argument rests in the fact that the GSEs have already paid back the Treasury in excess. Of the $188 billion of bailout money, around $225 billion has been paid to the Treasury in dividend payments.
With the GSEs exhibiting financial stability and the rapidly dwindling number of first time home buyers, many believe expanding the HTF and CMF is a step in the right direction for repairing the housing market and boosting affordable housing for everyone, regardless of economic strata. To add perspective, the percentage of first time home buyers has reached a 27-year low with only a 33 percent share of home 
sales. Those in favor of the decision are hoping to reverse the dismal statistics to strengthen the housing market and improve the national economy.
In a press release supplied by Senator Reed, a list of supporters include Senate Banking Committee Chairman Tim Johnson (D-SD), Maxine Waters (D-CA), Elizabeth Warren (D-MA), and Barbara Boxer (D-CA).
It must be reiterated to opponents that Mel Watt stated in his letters to the GSEs that the decision can be
reversed or updated, pending changes in the financial situations of the GSEs. In addition to the flexible nature of the decision, Watt also stated that Congress has the power to not allocate funds, if desired. Funds in fiscal year 2015 will be set aside and will become available for use in 2016.