Order Code RS22336
November 28, 2005
CRS Report for Congress
Received through the CRS Web
GSE Reform: A New Affordable Housing Fund
Eric Weiss
Analyst in Financial Institutions
Government and Finance Division
Summary
One key feature of the House government-sponsored enterprise (GSE) reform bill
(H.R. 1461) is the requirement that Fannie Mae and Freddie Mac give part of their
profits to create new affordable housing funds. Based on the GSEâ€™s average profits from
2000 to 2003, the amount would be about $390 million annually during the first two
years and $580 million in subsequent years. The requirement would expire after five
years.
The fund would help lower-income homeowners and renters and give priority to
the victims of natural disasters such as Hurricanes Katrina and Rita. Funds from Fannie
Mae and Freddie Mac would go to affordable housing organizations, which would then
work directly with the beneficiaries. Nonprofits would face controversial restrictions on
election and political activities. The bill also would modify existing GSE housing goals
to concentrate on lower-income families. It would set the housing goal targets in the
law, replacing the existing targets set by regulation.
The bill does not specify the legal, tax, or accounting details of the new funds or
their relationship with the GSEs. For a comparison of all aspects of the House and
Senate bills, see CRS Report RL32795, Government-Sponsored Enterprises (GSEs):
Regulatory Reform Legislation, by Mark Jickling.
This report will be updated as legislative events warrant.
Background on Housing GSE Mission
Fannie Mae and Freddie Mac purchase mortgages from lenders and package them
into mortgage-backed securities that they either hold in their portfolio or sell to investors.
Congress chartered Fannie Mae and Freddie Mac as stockholder-owned, government-
sponsored enterprises (GSEs) with the mission of supporting home ownership by
enhancing mortgage market liquidity and providing assistance to lower-income families
and underserved areas.1 In exchange, the GSEs receive several advantages, such as the
1 In this report, Fannie Mae and Freddie Mac are referred to by name, as GSEs, and as the
(continued...)
Congressional Research Service Ëœ The Library of Congress

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right to borrow $2.25 billion each from the U.S. Treasury, exemption from state and local
taxes, and exemption from the requirement to register securities offerings with the
Securities and Exchange Commission.
The Office of Federal Housing Enterprise Oversight (OFHEO) regulates the GSEs
for safety and soundness, whereas the Department of Housing and Urban Development
(HUD) monitors adherence to their mission goals. H.R. 1461 would combine OFHEO
and HUDâ€™s regulatory division into a new, independent regulatory agency called the
Federal Housing Finance Agency (FHFA).
The Federal Housing Enterprise Financial Safety and Soundness Act of 1992 (GSE
Act)2 gives HUD the authority to set specific goals for serving low-income families and
underserved markets. The 2005 to 2008 goals establish a minimum percentage of
mortgages in three income and geographic categories of homes for the GSEs to purchase
based on the origination of similar mortgages. A fourth goal is a minimum dollar volume
of purchases.3 H.R. 1461 would repeal the 2005-2008 goals and replace them with three
new sets: (1) housing goals, which are similar to the repealed goals but set in law instead
of regulation; (2) a duty to serve underserved markets; (3) and an affordable housing
fund.4 The new goals target slightly lower-income families than the current goals and
raise the percentage goals.
Housing Goals. The new housing goals would require the GSEs to purchase on
a percentage basis at least as many mortgages for very low- and extremely low-income
families as are generated by the primary market.5 The GSEs could request a reduction in
the percentage. The affordable housing funds cannot be used to meet the housing goals.
Duty to Serve Underserved Markets. The duty to serve underserved markets
sets no specific guidelines, goals, or targets, but the new FHFA is required to evaluate the
GSEs annually and report to Congress. The GSEs would be required to lead the industry
in creating new mortgage products for manufactured housing and in preserving affordable
housing developed under various HUD rental programs.
Affordable Housing Fund. The new affordable housing fund provisions require
each of the GSEs to contribute 3.5% of profits in the first two years and 5% in the next
three years. After five years, the fund expires. Based on the GSEsâ€™ average profits from
2000 to 2003, the affordable housing funds could receive $390 million annually during
1 (...continued)
enterprises. The Federal Home Loan Banks are also GSEs and covered by these bills, but
because they are covered in a different section, they are excluded from discussion here.
2 12 U.S.C. 11.
3 U.S. Department of Housing and Urban Development, â€œHUDâ€™s Housing Goals for the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) for the Years 2005 â€” 2008 and Amendments to HUDâ€™s Regulation of Fannie Mae
and Freddie Mac,â€ 69 Federal Register 63587, Nov. 2, 2004.
4 H.R. 1461, Sections 125, 126, and 128.
5 Very low-income families have incomes at or below 50% of area median family income;
extremely low-income families have incomes at or below 30% of area median family income.

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the first two years and $580 million annually during the next three years. The House bill
does not indicate how the funds will be managed.
The fund would have five general goals: (1) to increase home ownership by families
at or below 50% of area median income; (2) to increase mortgage funds in designated
low-income areas; (3) to increase the supply of rental and owner-occupied housing for
families at or below 50% of area median income; (4) to increase investment in public
infrastructure in connection with related affordable housing goals; and (5) to leverage
funding from other sources.6
H.R. 1461 would earmark the affordable housing fund. Twenty-five percent
(initially about $98 million) would go to the Federal Home Loan Banksâ€™ REFCORP.7 At
least 10% (initially about $39 million) would go toward home ownership activities. No
more than 12.5% (initially about $48 million) would toward public infrastructure
associated with financed affordable housing projects. The bill sets no minimum for rental
housing support.
The bill would include major additional provisions:
! Any profit from affordable housing fund activities would reduce the
allocation in the following year.
! The FHFA director would issue regulations to prevent Fannie Mae and
Freddie Mac from making the return on the funds for nongrants (which
could reduce their liability to provide funding in future years) the primary
consideration in awarding funds.
! Funds could not be used by the GSEs or recipients for administrative or
outreach purposes, except as allowed by the FHFA.
Other restrictions would apply to home ownership. First, only first-time home buyer
families with incomes at or below 50% of the area median income would be eligible.8
Second, the price of the home purchased could not exceed 95% of the area median for
comparable dwellings. Third, the homeowners could resell the house only to low-income
families, and resale profits would be subject to recapture for 10 years under certain
conditions.9 Any recaptured profits would be divided equally between the entity that sold
the home to the family and HUD, not the GSE that provided the funds used to purchase
the home.
There would be no restrictions on the funding mechanism: grants, market rate loans,
interest rate buy-downs, downpayment assistance, closing cost aid, and equity investments
6 H.R. 1461, Section 128(a).
7 CRS Report RS20197, Community Reinvestment Act: Regulation and Legislation, by William
Jackson, explains REFCORP.
8 First-time home buyers are home buyers who have not owned a home in the past three years.
Exceptions to this criteria exist for certain groups that have owned a home more recently.
9 H.R. 1461, Section 128, refers to section 215(b)(3) of the Cranston Gonzalez National
Affordable Housing Act (42 U.S.C. 12745[b][2]). The 10-year time limit and other resale
provisions are in 42 U.S.C. 12745(b)(3).

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are allowed, but the funding would go to for-profit and nonprofit developers of affordable
housing. Funding could go only to an organization, agency, or other entity with
experience in similar affordable housing activities. An organization with experience
running affordable rental housing might not be eligible to build owner-occupied units.
Funding cannot go directly to a family.
Restrictions on Sponsors. The primary business activity of those directly
funded would have to be the provision of affordable housing. The funds could not be used
for political activities, advocacy, lobbying (directly or indirectly), counseling services,
travel expenses, preparing or providing advice on tax returns, administrative costs, or
outreach. If the entity is a nonprofit, it would have further restrictions on political and
election activities:
! The nonprofit could not have engaged in federal election activities or
lobbying for a period starting 12 months before submitting an application
for funding.
! The nonprofit could not be affiliated with any organization, agency, or
entity that does not comply with these electioneering and lobbying
limitations. Affiliation is defined in terms of overlapping boards of
directors, executives, staffs, shared resources, and funding.
! If the recipient is a national nonprofit, the funds could not be distributed
to another nonprofit.
! The funds could not replace or free up other funding.
The restrictions on election-related activities would prevent many groups, such as
the Association of Community Organizations for Reform Now (ACORN), and the
National Council of La Raza, from receiving funding as they are currently constituted.10
More than 100 nonprofits â€” including three local chapters of Habitat for Humanity, the
League of Women Voters, United Way of America, labor organizations, and religious
groups â€” have sent House members a letter objecting to what they term the â€œgagâ€
provision.
The restriction preventing national nonprofits from redistributing funding would
prevent the GSEs from using a related organization, such as the Fannie Mae Foundation,
as an intermediary in distributing affordable housing fund monies. It also would prevent
Habitat for Humanity from passing affordable housing funds on to local affiliates. (In
FY2004 Habitat gave local affiliates nearly $64 million.11) The bill would not, however,
prevent funds from going directly to local affiliates, as already occurs in a similar program
run by the Federal Home Loan banks.
Advisory Affordable Housing Board. The funds would be monitored by an
advisory Affordable Housing Board that would be appointed by, and report to, the FHFA
10 Republican Study Committee, Legislative Bulletin, Oct. 26, 2005, p. 7. See
[http://johnshadegg.house.gov/rsc/GSE%20Legislative%20Bulletin.pdf]. Viewed Nov. 28, 2005.
See also [http://www.nlihc.org/news/101905.html], viewed Nov. 28,2005.
11 Habitat for Humanity International, Inc., Audited Consolidated Financial Statements, Years
Ended June 30, 2004 and 2003 with Report of Independent Auditors, page 5. See
[http://www.habitat.org/giving/report/2004/FINANCIALS.pdf]. Viewed Nov. 24, 2005.

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director. The board would be charged with determining extremely low- and very low-
income housing needs. It would advise the director on establishing selection criteria and
changes to the program. It would review the quarterly reports from the enterprises and
inform the director if the funding activities comply with the regulations setting funding
priorities. The board would be considered a federal advisory board, meaning that
meetings must be publicly announced and open. Committee records, including minutes,
would be available for public inspection and subject to the Freedom of Information Act
(FOIA).
The board would include the director of the FHFA, the Secretaries of HUD and
Agriculture, two persons from for-profit affordable housing companies, and two persons
from nonprofit affordable housing organizations. The first three members could designate
others to be on the board in their places. The director could appoint up to four other
persons to the board.
The GSEs would have some enforcement and compliance responsibilities. If Fannie
or Freddie were to determine that a recipient had misused affordable housing funds, the
recipient would have to repay the funds and would be permanently barred from program
participation. There would be no lesser penalty. This debarment authority is not shared
with FHFA.
Priorities. The director would issue regulations with specific criteria for selecting
projects. The bill would establish a series of priorities. During the first two years, the top
priority would go to the areas and persons affected by Hurricanes Katrina and Rita. The
next levels of priority would be (1) other presidential disaster areas, (2) the greatest
impact, (3) geographic diversity, and (4) the ability to obligate the funds and undertake
the activities quickly. â€œGreatest impactâ€ and â€œgeographic diversityâ€ are not defined in the
bill. For rental projects, additional priorities would be (1) affordability for families with
incomes below 30% of area median income and (2) the duration that rental projects would
remain affordable to extremely low-income families. In rental housing projects, only
families with incomes at or below 50% of the area median income could benefit from the
funds. This criteria differs from the housing goals, which would count units that would
be affordable to families of the target income regardless of actual tenant incomes.
Historically, housing goals have used the latter approach because it is difficult for the
GSEs to determine the income of rental tenants.
In addition, Fannie Mae and Freddie Mac would be prohibited from making
affordable housing fund assistance preferential or conditional on obtaining financing or
underwriting from the enterprise.
Policy Analysis. H.R. 1461 raises a number of policy issues. First is the question
of incentives and unintended consequences. Connecting the size of the affordable
housing fund to GSE profits may result in unintended incentives. The connection
between profits and fund size will give for-profit and nonprofit affordable housing
developers a stake in the GSEsâ€™ profitability. The GSEs have two major profit centers:
packaging individual mortgages into mortgage-backed securities and holding large
portfolios that consist mainly of mortgage-backed securities. Both profit centers present
risks that would be regulated by FHFA (or OFHEO under current law). Large portfolios
are more profitable for the companies but mainly benefit the GSEs, their stockholders,
and senior management whose compensation is tied in part to corporate profitability

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rather than supporting the mortgage market. Large portfolios also represent systemic risk
to the financial system as a whole.12 Nevertheless, because increasing the size of the
portfolios would increase profits and thus the affordable housing funds, recipients and
potential recipients would have reasons to support portfolio growth, which may or may
not be what Congress intends.
A related issue is the potential for the GSEs to use their affordable housing funds in
ways that further their corporate goals. The director would be mandated to issue
regulations to prevent the GSEs from making the return of funds the primary
consideration in awarding funds, which would reduce their future contributions. The bill
would prohibit them from tying the funds to other transactions with the enterprise, but
nonpecuniary and nonfinancial returns to the GSEs are not addressed.
H.R. 1461 does not address the question of the legal, accounting, and tax
relationships between the GSEs and their affordable housing funds. Are the funds
separate, independent legal entities? At what time of the year must the GSEs make their
contributions to the funds? Who controls the money in the funds before it is released to
the recipients? What type of investments would be allowed for the $400 million to $600
million or more added each year? Who is responsible if the funds incur losses? What are
the tax liabilities of the funds? If a fund makes a loan, what happens if the borrower
defaults? Profits are returned to the fund and reduce the funding required the following
year, but what about losses? Are recaptured profits of first-time homeowners returned to
the GSEs, and if so, does this reduce the amount that they must contribute? H.R. 1461
states that the GSEs do not need to hold risk-based capital against the affordable housing
funds, but what about minimum capital requirements?
In addition to the persons named in H.R. 1461, up to four others can be named to the
Affordable Housing Board. Could these be from the GSEs? The Fannie Mae Foundation
(but not the Freddie Mac Foundation) promotes affordable housing for extremely low-
and very low-income families. Could someone from the Fannie Mae Foundation be
appointed to the board? The board is charged with overseeing the distribution of funds.
Is there a conflict of interest if an organization with an employee or officer on the board
applies for funding? Is there a conflict of interest if a fund applicant has an existing
business relationship with the GSE?
Legislative Developments
! H.R. 1461 was reported by the Committee on Financial Services to the
House with an Affordable Housing Fund provision on July 14, 2005.
! H.R. 1461 was passed by House by a vote of 331 to 90 and sent to the
Senate on October 30, 2005.
! S. 190 was reported by the Committee on Banking, Housing, and Urban
Affairs to the Senate without an Affordable Housing Fund provision on
July 28, 2005.
12 CRS Report RS22307, Limiting Fannie Maeâ€™s and Freddie Macâ€™s Portfolio Size, by Eric
Weiss, summarizes some of the concerns that many analysts have about the size of the GSEsâ€™
portfolios.