The Bush administration opposes a plan to tap Fannie Mae, Freddie Mac and the Federal Housing Administration to fund affordable rental units and down-payment assistance for first-time home buyers.
A bill introduced last month, HR 2895, would create a National Affordable Housing Trust Fund to be administered by the Department of Housing and Urban Development (HUD), and provide up to $1 billion a year in funding.
Backers say the fund would be used to build, rehabilitate and preserve 1.5 million units of affordable rental housing, and to provide down-payment and closing-cost assistance for first-time home buyers.
But HUD Assistant Secretary Brian Montgomery told members of the House Financial Services Committee Thursday that the bill’s reliance on projected revenue from the FHA would “essentially be robbing Peter to pay Paul,” because such diversions would have to be offset by Congress.
“We could find ourselves in a position where the affordable-housing trust fund is funded, but other, higher-priority programs are cut,” Montgomery said in his prepared remarks. “There’s no free lunch here.”
Montgomery said the Bush administration also opposes plans to tap Fannie Mae and Freddie Mac for funding, because that could “create an undue and counterproductive reliance” on growth in the government-sponsored mortgage repurchasers’ loan portfolios.
The Bush administration “shares your strong commitment to providing families with safe, decent and affordable housing,” Montgomery told committee Chairman Rep. Barney Frank, D-Mass., a sponsor of the bill. “We believe, however, that while the intent of your legislation is laudable, there are existing tools in the federal arsenal that would better achieve our shared goals.”
Montgomery cited HUD’s $2 billion-a-year HOME Investment Partnerships Program, which helps state and local governments build, buy or rehabilitate affordable housing, and the American Dream Downpayment Initiative, which helps first-time home buyers make down payments and cover closing costs.
Sheila Crowley, president of the National Low Income Housing Coalition, said a national housing trust fund with “dedicated sources of revenue” has been the group’s top priority since 2000. Crowley said the proposed trust fund would not depend on regular appropriations or reduce funding to existing programs.
“I know that some critics will say we do not need a new program, that existing federal housing programs would suffice,” Crowley said in her prepared remarks to the committee. “If the argument is that existing programs would suffice if they were funded at higher levels, it is at least a more plausible argument in the abstract. But the stark reality is that the federal budget is in a deep deficit and anything other than small improvements to the funding levels of existing programs are not likely in the foreseeable future.”
Trust fund depends on GSEs, FHA
Funding for the National Affordable Housing Trust Fund, however, hinges on the passage of two other bills.
One, HR 1427, is intended to strengthen regulatory oversight of Fannie Mae and Freddie Mac. A version of the bill passed by the House on May 22 would provide more than $500 million a year for an affordable housing fund, by requiring the government-sponsored entities (GSEs) to contribute an amount equal to 1.2 basis points of their outstanding mortgages to the fund.
HUD objects to the idea in principle, and also to any diversion funds generated by the GSE reform bill to a new, separate housing trust fund, Montgomery said, citing a Bush administration policy statement issued in May.
Backers of a National Affordable Housing Trust Fund also envision that a bill intended to modernize the FHA’s mortgage insurance programs will generate revenue that could be a major source of funding
The FHA modernization bill, HR 1852, would give HUD flexibility to set risk-based premiums, insure zero-down loans, and raise the eligible loan limit in high-cost areas. That would allow FHA to insure more loans, and charge more to do so.
FHA has estimated that if the modernization bill is passed, the loans it insures could generate $342 million in revenue in 2008, rather than a $143 million taxpayer subsidy if it continues doing business as usual.
A recent report by the Government Accountability Office cautioned that the proposed expansion of FHA’s insurance program could also introduce new risks, such as higher default rates on loans with smaller down payments. HUD officials say they can manage such risks, but there are also questions about how risk-based pricing would affect who would qualifies for FHA insurance.
The GAO report concluded that 43 percent of FHA borrowers in 2005 would have paid the same or less for insurance under risk-based pricing, 37 percent would have paid more, and 20 percent — those with the highest expected claim rates — would not have qualified for FHA insurance at all.
Incentives for risk?
Montgomery said the Bush administration’s issue with the proposed funding methods for a National Affordable Housing Trust Fund stem from the fact that FHA’s revenues are already credited against HUD appropriations.
“Any new program that attempts to access this revenue, whether explicitly or implicitly, would disrupt and needlessly complicate the appropriations process,” Montgomery said.
As written, HR 2895 might not only jeopardize funding for other HUD programs, but create an incentive for FHA to charge higher premiums “than is safe and prudent,” Montgomery said.
“With a trust fund dependent on a certain level of FHA receipts, policymakers could feel pressured to hit certain revenue targets,” Montgomery said. “Rather than working to ensure that FHA’s traditional borrowers — low-income and first-time home buyers — are being charged the lowest possible premium, FHA might find itself forced to charge higher premiums to finance unrelated programs through the housing fund.”
The Bush administration and other opponents of plans to tap Fannie and Freddie for an affordable housing fund have made similar arguments, saying that could create incentives to allow unrestrained growth of the GSEs’ loan portfolios.
Crowley said that while most of the money directed to the National Affordable Housing Trust Fund would be used for rental housing, those efforts will also help put low-income families on the path to home ownership.
Low-income families, she said, “have a much greater chance of becoming successful homeowners … after being stable and successful renters who are able to develop good credit histories and have enough extra income to save for a down payment.”
By “idealizing” home ownership at the expense of rental housing, policymakers have created a “false dichotomy” that has contributed to the proliferation of subprime and predatory lending, Crowley said.