Raymond K. James, Esq.
CARH Lobbyist
Coan and Lyons
Washington, D.C.
202.728.1070
News from Washington, cont'd
There’s a buzz in Washington over a Bill that creates a new regulator for Fannie Mae and Freddie Mac because it has a piece in it that represents the dream of many advocates and groups to create a housing trust or a fund with money for Housing. This legislation creates an Affordable Housing Fund. Now this is not just a Bill; it has been approved by the House Financial Services Committee by a pretty large margin. Similar ideas have been floated in the Senate, so this may become a reality.
A number of groups are salivating over what they say is up to a Billion dollars a year in money for Housing, development, preservation, home ownership. It is quite an exciting thing. I see people in the halls in Congress that I haven’t seen in years — manufactured housing people and others — all trying to get a piece of that up to a Billion dollars a year. There are more demands on it than there are funds.
Funded by After-Tax Profits
Here are some of the details because I think we have to pay attention to it, just like everyone else is paying attention because it is a source of new money. The Bill would create a new independent regulator for Fannie Mae and Freddie Mac outside the Department of HUD, outside the Treasury Department and totally independent. Part of the duties of the Director would be to supervise a fund created with after tax profits of Fannie Mae and Freddie Mac.
The first year it would be 3.5% of their after tax profits; after that it would be 5% of the after tax profits. People have estimated it may be $400 million up to a Billion a year when it gets cranking. We really can’t tell for sure because we don’t know how the numbers will be manipulated by the organizations.
Fannie Mae and Freddie Mac would actually make the money available. It is not clear to whom; it is not clear if there would be intermediaries that would then redistribute the money. But the money would be distributed on the basis of guidelines and criteria that would be established by the Director of the regulatory agency. The Director would have an advisory board that let the Director determine the criteria. The advisory board would have nonprofit members, for profit housing members, someone from Agriculture and someone from HUD.
I have to say that in this legislation Rural Housing is not forgotten. We’re up there with everything else; whenever a HUD program is mentioned, 515 is mentioned. So Rural Housing (Agriculture) would have equal representation with HUD on this advisory committee.
What could the money be used for? It could be used for homeownership for first time home buyers - either construction of new homes or rehabilitation of existing properties. The big kicker here is that the beneficiaries of this program would have to be very low income or extremely low income, extremely low income being 30% or below of median income. So it establishes a home ownership program for very low income — 50% or below of median or for extremely low income. There is no earmarking between the very low and extremely low; in other words, they are both mentioned but there is no requirement such as that 50% has to go to this group or 70% to that group. The very fact that they are both mentioned suggests that there is Congressional intent, not yet specified, that some portion definitely goes to the extremely income group.
Policies on Where the Money Goes
That raises some interesting issues, especially with respect to the homeownership part, that is a very very low income group to become home owners, even if the entire costs of the home are paid for.
With respect to rental, this money could finance new construction or preservation activities with respect to existing housing programs. In other words this is not a new program; it is taking the 202 program or the 515 program and putting some money in for some new units or for the preservation of some 202 or 515 units.
A third purpose, it is not particularly clear to me, is to induce investment in low income areas; it is not clear whether this is a separate housing or the same kind of housing covered by the other eligible activities. But if you find a poor area, put some more housing in for poor people.
There is some general guidance on criteria for selection. They don’t make too much sense to me, but I guess they will be worked out. Priority should be given to the use of funds that have the greatest impact., I don’t know exactly what that is going to mean. There should be geographic diversity, so even if it doesn’t have impact you might have to give something to North Dakota, Montana or Idaho. There is the usual thing that the money should be used in a timely manner and funds should be given to an activity or recipient who can show usage in a timely manner. Finally, the last criterion involves the extent and duration of affordable rents, particularly for extremely low income.
Funds from Profits
You’re really looking at a preference for a deep subsidy program for the limited pool of nation wide grant funds. It has quite a solid mix — how do you use this annual grant to make sure low and extremely low income persons have an affordable rent for 10 or 15 years? It will be an interesting trick.
In addition, of course, Fannie Mae and Freddie Mac still have their affordable housing goals, which are really how they invest in mortgages — they still have to invest 30% or whatever of their funds in low and moderate income mortgages. This is unaffected by this new program; this is an entirely separate program.
Fannie Mae and Freddie Mac will not have to contribute anything if they are not meeting their capital standards. Like the existing regulator, the new regulator will establish standards for capital in case there is a problem in the future so there are enough assets to weather the problem. So if Fannie or Freddie falls below a required capital standard, this fund would not receive any money for that year. So this is not a guaranteed annual fund; it is perhaps a stop and go fund. If Fannie or Freddie don’t have any profits in any year, of course the fund will not get any money for that year.
One of the interesting things is the extent of the Republican support for this program. It is challenged by conservative Republicans on the Financial Services Committee, but the majority of the Republicans on the Committee voted in favor of this program.
One concern I would have is that I wouldn’t want this program to replace appropriated funds for 515, 202, or Section 8 Vouchers; but it does present a danger that OMB is looking for every way it can find to cut housing costs, every single maneuver it can take. It may say ÒYou’re getting $300 million for 515 and 202 construction and preservation, we’ll cut some from you budget.Ó We have to watch for that, too.
GSEs, Private Stockholders
I think the legality of this has been explored, but Fannie and Freddie are Government Sponsored Enterprises (GSEs), but they are not Federal agencies. They have private stockholders. It has been estimated that because of their Federal tie-in, they earn X dollars more profit than if they didn’t have their relationship with the Federal government. The Federal Reserve Board and Congressional Budget Office have estimated that part of that benefit goes into lower mortgage rates, but also a part goes into higher profits. So it may be this fund is looked at as a way to recapture to the Government for public uses that part of the relationship to the Federal government that leads to higher profits. I don’t know but it looks to me close to a Takings and someone could challenge this if it becomes law. Certainly a private stockholder would be getting less in dividends because of this.
The other item I want to mention is the RHS Preservation Program for Rental Housing. They’ve issued an announcement and had briefings and it looks like a pretty good plan; there is some legislation required to implement the Program, but it is not quite understood on how the Agency plans to proceed.
Vouchers for Preservation?
When we saw the Federal Budget in February, all we saw was a request for $214 million for Vouchers and administrative expenses. The Vouchers were supposed to be for tenant protection in case the 515 loan was prepaid. So we’re all scratching our heads on how does that relate to the total Preservation package they had described to us — it involved forgiving 515 loans and capital grants. So we’ve been waiting for the legislation to come from RHS. We saw an early technical drafting service version which was just not adequate. Hopefully when RHS finally submits legislation it will make sense.
The train is leaving — the House Appropriations Committee acted on RHS appropriations and said we’re not giving you anything for Vouchers because we don’t have any legislation from you. The Senate Appropriations Committee will be marking up in a few weeks. We know Bill Simpson on the Democratic staff on the subcommittee in the Senate and he has taken it on himself to be a Statesman and try to put in a program for Preservation. But he too is quite unsure about the Voucher component and what it involves.
Right now we still have the restrictions on prepayment; RHS has not said they would recommend removing the restrictions. We have some lawsuits with the bulk of them involving damages rather than the ability to prepay; in one Federal Circuit there have been some cases which actually resulted in prepayment, but that’s hardly enough fodder for $214 million in Vouchers. So the intentions of the Administration which respect to prepayment are still very unclear; we hope in a week or so we will have more information about that.
There were some extraordinary recommendations in the HUD budget. A major one you might have heard is that the Community Development Block Grant program (CDBG) which many of us have used was proposed to be moved to the Commerce Department, stripped of its housing element and made into an Economic Development program with about $2 Billion less a year. It was very apparent that this was not a serious request because nobody would say what was in the legislation transferring and revising the program. Nobody provided any legislative details. HUD and Commerce jointly testified about it, with no details on the transfer.
Absolutely no one on the Hill supported it, Republicans or Democrats, and it has been now terminated before it was proposed in legislation. I wondered a lot why they did that and all I can think of it was a maneuver to lower the final budget total because now that HUD has rejected what they proposed, they’ve got to move the money from someplace else to cover the increased CDBG appropriations; which they are doing. Some of the money is coming out of the Defense budget.
OMB Desperate to Cut
They are trying to transform the Section 8 Voucher program allegedly to give more flexibility to local Public Housing Agencies in how they determine subsidy amounts, rents, and a variety of issues. Their major objective however is to create a system which can continue to function if the budget is substantially cut. In other words, if a lot less money is given to the PHAs for this program, the PHAs have the discretion to serve people with higher incomes and that will stretch the limited dollars. Each 1% increase in average income served in the Section 8 Voucher program saves $300 to $400 million dollars. So there are big savings in raising the income level of the beneficiaries of the program.
They would do away with the Brooke Amendment so that if there wasn’t enough money, the tenant rent payments could be increased. Another way to increase the burden on tenants is to lower the subsidy amounts. This proposal would give the PHAs almost unfettered discretion to work with a much more limited budget and serve the same number of people, but they’d be different people and their rent burden would be greater. There has been a Bill introduced in both the House and Senate, but I think for all practical purposes it is a dead duck. But the Administration keeps trying. We’ll see over the next year what happens with this one.
Anyway, OMB is desperate to cut the domestic budget.
Thank you.
Next: RD Nitty-Gritty: Remarks by Jackie J. Gleason