The New GSE Affordable Housing Funds: The Housing Trust Fund and the Capital Magnet Fund

The New GSE Affordable Housing Funds: The Housing Trust Fund and the Capital Magnet Fund

Order Code RL34158
The New GSE Affordable Housing Funds:
The Housing Trust Fund and
the Capital Magnet Fund
Updated November 25, 2008
N. Eric Weiss
Specialist in Financial Economics
Government and Finance Division
Katie Jones
Analyst in Housing
Domestic Social Policy Division

The New GSE Affordable Housing Funds:
The Housing Trust Fund and the Capital Magnet Fund
Summary
One key feature of the Housing and Economic Recovery Act of 2008 (P.L. 110-
289), which was signed into law on July 30, 2008, is the requirement that two
government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, contribute
a percentage of the value of their total new business purchases to two new affordable
housing funds. The Congressional Budget Office estimates that these two funds, the
Housing Trust Fund and the Capital Magnet Fund, could together receive
approximately $624 million in FY2012, the first year in which they will be fully
funded. The Director of the Federal Housing Finance Agency (FHFA), a new agency
created by P.L. 110-289 to be a unified regulator for the GSEs, is required to suspend
contributions to the affordable housing funds in the case of GSE financial trouble.
In FY2009, the GSE contributions are to be used to support the HOPE for
Homeowners program, also created by P.L. 110-289. This support is to be reduced
and support for the Housing Trust Fund and the Capital Magnet Fund increased until
in FY2012 the HOPE program gets 25% and the affordable housing funds get 75%
of the total contributions. Of the share allocated to the affordable housing funds, the
Housing Trust Fund is to receive 65%, and the Capital Magnet Fund is to receive
35%. The Secretary of the Department of Housing and Urban Development is to
develop a formula to allocate the Housing Trust Fund money to the states. The U.S.
Treasury is to develop a competitive grant process to distribute the Capital Magnet
Funds to community development financial institutions and nonprofit housing
corporations.
A critical issue behind the GSE contributions to the affordable housing funds
is the rationale for using the GSEs as the funding source. The justification is that the
GSEs have special charters from Congress that give them special treatment, such as
exemption from state and local income taxes and the ability to borrow up to $2.25
billion from the U.S. Treasury. In return for these privileges, the GSEs’ charters limit
their business activities to purchasing home mortgages and supporting affordable
housing. Opponents of GSE contributions to affordable housing funds are concerned
that the cost of the contributions would be passed on to mortgage borrowers and that
the contributions could create an incentive for advocates of the funds to encourage
the GSEs to grow beyond what is financially sound.
On September 7, 2008, the Federal Housing Finance Agency put Fannie Mae
and Freddie Mac under its conservatorship, and the Treasury agreed to provide up to
$100 billion in emergency funding to each. On November 13, 2008, FHFA informed
Fannie Mae that it should suspend its contributions until further notice. It is unclear
what long-term effect these developments will have on the affordable housing funds.
.
This report will be updated as events warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background on Affordable Housing Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . 1
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GSE Affordable Housing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Housing and Economic Recovery Act (P.L. 110-289) . . . . . . . . . . . . . . 3
The New Affordable Housing Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contributions to GSE Affordable Housing Funds . . . . . . . . . . . . . . . . . . . . . 4
Housing Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Capital Magnet Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Restrictions on Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Restriction on Eligible Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Restrictions on Sub-Recipients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Requirements and Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Issues Surrounding GSE Contributions to the Affordable Housing Funds . . . . . . 9
Why Should the GSEs Support an Affordable Housing Fund? . . . . . . . . . . . 9
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Conservatorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Appendix 1. Legislative History of Housing Trust Fund Bills . . . . . . . . . . . . . . 13
106th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Phase-In of Funding for Affordable Housing Funds,
FY2009-FY2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. Share of Affordable Housing Funds Going to the
Housing Trust Fund and the Capital Magnet Fund . . . . . . . . . . . . . . . . . . . . 5

The New GSE Affordable Housing Funds:
The Housing Trust Fund and
the Capital Magnet Fund
Introduction
Over the last several years, low-income housing organizations, led by the
National Low Income Housing Coalition, have advocated for the establishment of a
national affordable housing trust fund. Proponents argued that an affordable housing
trust fund would provide a permanent source of dedicated funding for affordable
housing activities that would not be subject to the annual appropriations process.
Legislation to create an affordable housing trust fund has been introduced in every
Congress since the 106th Congress. On July 30, 2008, the Housing and Economic
Recovery Act of 2008 (P.L. 110-289) was signed into law and created two affordable
housing funds using contributions from Fannie Mae and Freddie Mac. This report
details the structure of the affordable housing funds and their funding mechanism.
It also provides a discussion of the rationale for requiring Fannie Mae and Freddie
Mac to contribute to affordable housing funds and outlines current issues that may
affect the funds. This report will be updated as events warrant.
Background on Affordable Housing Trust Funds
For several years, a coalition of low-income housing organizations has
advocated for the establishment of a national affordable housing trust fund.
Proponents of a trust fund wanted a permanent funding stream that would not be
subject to the annual appropriations process, would not come out of other housing
programs, and would be dedicated to affordable housing activities for low-income
households. The idea of an affordable housing trust fund was not new; several states
and localities have already adopted their own state and local trust funds. However,
organizations such as the National Low Income Housing Coalition, one of the leading
proponents of a national affordable housing trust fund, argued that a federal fund
should be established to complement these state and local efforts.1
Opponents of a national housing trust fund argue that the federal government
already provides funding for affordable housing through other programs and that a
national housing trust fund could be duplicative of these programs. In recent years,
1 For details on the campaign for a national affordable housing trust fund, see the National
Low Income Housing Coalition’s website, “National Housing Trust Fund Campaign,”
available at [http://www.nlihc.org/template/page.cfm?id=40].

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opponents have also pointed to concerns about growing federal budget deficits as an
argument against establishing a national affordable housing trust fund.
Legislation to establish a national affordable housing trust fund has been
introduced in every Congress since the 106th.2 One major question surrounding the
creation of an affordable housing trust fund has been how the program would be
funded. Early legislation proposed using a portion of receipts from the Federal
Housing Administration (FHA), but diverting FHA receipts to a housing trust fund
would count as new spending and would be subject to annual spending limits,
including the Pay-As-You Go rule (PAYGO).3
Later legislation proposed using contributions from Fannie Mae and Freddie
Mac, two government-sponsored enterprises (GSEs), as a potential funding source.
Since the GSEs are private entities, using contributions from Fannie Mae and Freddie
Mac would not count as new government spending. There is some disagreement
over whether it is appropriate for the government to require the GSEs to contribute
to affordable housing funds. Opponents of GSE contributions argue that the GSEs
should not be asked to balance public policy objectives against the interests of their
shareholders. Proponents point to the special privileges that GSEs receive and the
housing goals that they already have to justify their contributions to affordable
housing funds.
Government-Sponsored Enterprises
The government-sponsored enterprises are the Federal National Mortgage
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac), and the Federal Home Loan Banks (FHLBanks). Congress chartered Fannie
Mae and Freddie Mac as stockholder-owned, government-sponsored enterprises with
the mission of supporting home ownership by enhancing mortgage market liquidity
and providing assistance to lower-income families and underserved areas. By law,
the GSEs cannot make loans directly to property owners. Instead, Fannie Mae and
Freddie Mac purchase mortgages from lenders and package them into mortgage-
backed securities (MBS) that they either hold in their portfolios or sell to investors.4
The 12 Federal Home Loan Banks make up a third collective housing GSE with
a similar mission. The FHLBanks are owned by member organizations (originally
2 For a legislative history of affordable housing trust fund proposals, see the National Low
Income Housing Coalition’s website, “Details about the National Housing Trust Fund
Campaign,” January 31, 2007, available at [http://www.nlihc.org/detail/article.cfm?article
_id=3834#prop], or see Appendix 1.
3 See CRS Report RL34300, Pay-As-You-Go Procedures for Budget Enforcement, by Robert
Keith for more information on Congressional budgeting rules, including PAYGO.
4 See CRS Report RS21663, Government-Sponsored Enterprises (GSEs): An Institutional
Overview by Kevin R. Kosar for more information about GSEs.

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savings and loan associations). FHLBanks’ member organizations pledge mortgages
as collaterals to obtain loans (called advances) from the FHLBanks.5
As part of the GSEs’ special nature as private entities with public charters, they
receive several advantages that private sector firms do not. These advantages include
the right to borrow from the U.S. Treasury and exemption from state and local
income taxes.6
GSE Affordable Housing Obligations. In exchange for the privileges that
GSEs receive, the government requires them to balance profitability with support for
certain affordable rental and home ownership housing activities. Historically, the
Department of Housing and Urban Development (HUD) had the authority to set goals
to ensure that Fannie Mae and Freddie Mac served low-income families and
underserved markets.
The FHL Banks have three missions: providing liquidity to member institutions,
contributing to housing and community development, and, temporarily, repaying debt
for losses incurred during the savings and loan failures of the 1980s. To meet the
second goal, each FHL Bank funds an affordable housing program with a statutory
contribution of 10% of its annual net earnings to low- and moderate-income housing.
The Housing and Economic Recovery Act (P.L. 110-289)
On July 30, 2008, the Housing and Economic Recovery Act of 2008 (P.L. 110-
289), was signed into law. P.L. 110-289 attempts to address trouble in the U.S.
housing market by creating some new programs to help home owners at risk of
foreclosure and by making a number of changes to existing aspects of the housing
finance industry. The legislation makes major changes to Fannie Mae and Freddie
Mac, including creating a new regulator with broader oversight powers, requiring that
regulator to create new affordable housing goals, and creating an explicit duty to
serve underserved markets.
P.L. 110-289 also requires Fannie Mae and Freddie Mac to contribute to two
new affordable housing funds. Projects funded by the affordable housing funds will
not count toward the duty to serve underserved markets. The affordable housing
funds are discussed in detail below.
5 See CRS Report RL32815, Federal Home Loan Bank System: Policy Issues, by Edward
Vincent Murphy for background on the FHLBanks.
6 See CRS Report RS21663, Government-Sponsored Enterprises (GSEs): An Institutional
Overview, by Kevin R. Kosar for more information on GSE privileges.

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The New Affordable Housing Funds
P.L. 110-289 authorizes the creation of two affordable housing funds using
contributions from Fannie Mae and Freddie Mac. The first, the Housing Trust Fund,
is to provide formula-based grants to states to increase the supply of affordable
housing, especially rental housing, for extremely low- and very low-income
households.7 The second affordable housing fund, the Capital Magnet Fund, will be
administered by the Treasury Department’s Community Development Financial
Institutions (CDFIs) Fund and is to provide competitive grants to Treasury-certified
community development financial institutions and qualified non-profits to support
low-income, very low-income, and extremely low-income housing and economic
development activities. Community development financial institutions are
organizations that provide loans and financial services in underserved communities.
Contributions to GSE Affordable Housing Funds
P.L. 110-289 requires both Fannie Mae and Freddie Mac to contribute 4.2 basis
points (.042%, or .042 cents) for each dollar of the unpaid principal balances of their
new business purchases to the affordable housing funds each year. New business
purchases are mortgages that are purchased by the GSEs in a given year, whether the
GSE holds them in its own portfolio or packages and sells them to other firms
through a securitization process. The Director of the new GSE regulator, the Federal
Housing Finance Agency (FHFA), is to temporarily suspend either GSE’s
contributions if he finds that the contributions are (1) contributing to the GSE’s
financial instability, (2) causing the GSE to be undercapitalized, or (3) preventing the
GSE from successfully completing a capital restoration plan.
Each year, the first 25% of the contributions is to go to a HOPE for
Homeowners Reserve Fund for as long as such a fund is in existence. HOPE for
Homeowners is a new program created by P.L. 110-289 to help homeowners at risk
of foreclosure.8 In FY2009, all of the GSE contributions are to provide additional
funding to reimburse the Treasury for the cost of the HOPE for Homeowners
program, and none of the contributions will go to the affordable housing funds.
Between FY2010 and FY2011, a declining portion of the GSE contributions is to
continue to go to the HOPE for Homeowners program, while an increasing portion
is to go to the affordable housing funds. Of the funds that are allocated to the
affordable housing funds, 65% is to go to the Housing Trust Fund and 35% to the
Capital Magnet Fund. Beginning in FY2012, all funds other than the first 25% that
is diverted to the HOPE for Homeowners Reserve Fund are to go to the affordable
housing funds. Of the additional funds that are to be diverted to the HOPE for
7 Extremely low-income households have incomes at or below 30% of area median income,
and very low-income households have incomes at or below 50% of area median income.
Low-income households have incomes at or below 80% of area median income.
8 HOPE for Homeowners is a new program in which some borrowers at risk of foreclosure
can refinance their existing loans into FHA-insured mortgages. For more details on this
program and other features of P.L. 110-289, see CRS Report RL34623, Housing and
Economic Recovery Act of 2008, by N. Eric Weiss, Darryl E. Getter, Mark Jickling, Mark
P. Keightley, Edward Vincent Murphy, and Bruce E. Foote.

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Homeowners program between FY2009 and FY2012, any excess funds remaining
after the HOPE for Homeowners program ends are to revert back to the affordable
housing funds. Figure 1 and Figure 2 illustrate the phase-in of funding for the
affordable housing funds and the allocation of that funding to the Housing Trust
Fund and the Capital Magnet Fund, respectively.
Figure 1. Phase-In of Funding for Affordable Housing Funds,
FY2009-FY2012
25%
75%
2009
25%
37.50%
37.50%
2010
HOPE Reserve Fund
r
a
Ye
Additional Funding for HOPE
25%
18.50%
56.50%
for Homeowners
2011
Affordable Housing Funds
25%
75%
2012
0%
20%
40%
60%
80%
100%
Percentage of GSE Contributions
Figure 2. Share of Affordable Housing Funds
Going to the Housing Trust Fund and
the Capital Magnet Fund
Capital
Magnet
Housing
Fund,
Trust
35%
Fund,
65%

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According to estimates prepared by the Congressional Budget Office (CBO), the
affordable housing funds could together receive $283 million in FY2010, $446
million in FY2011, and $624 million in FY2012, the first year in which the housing
funds receive their full share of GSE contributions. These estimates assume that the
GSEs’ new business purchases will grow between 4% and 6% per year, the same rate
at which CBO expects outstanding mortgage debt to grow for the nation as a whole.9
On September 7, 2008, FHFA announced that it was placing both Fannie Mae and
Freddie Mac under conservatorship. It is unclear how this move will affect the
GSEs’ new business purchases, and hence their contributions to the affordable
housing funds, going forward.
Although P.L. 110-289 designates only the GSE contributions as a dedicated
funding source for the affordable housing funds, it includes language stating that
other funds can be appropriated or transferred to the affordable housing funds
through other legislation.
Housing Trust Fund
As noted earlier, 65% of the monies allocated to the affordable housing funds
go to the Housing Trust Fund, which is to provide formula-based grants for states to
increase housing opportunities for extremely low- and very low-income renters and
home owners. The Secretary of HUD is required to develop a formula for allocating
the monies in the Housing Trust Fund among the states10 within 12 months of the
law’s enactment. The allocation formula is to be based in part on the following
factors:
! the relative number of affordable standard rental units available to
extremely low-income renter households in the state (this factor is
given “priority emphasis”);
! the relative number of affordable standard rental units available to
very low-income renter households in the state;
! the relative number of extremely low-income renter households
living with incomplete kitchen or plumbing facilities, more than one
person per room, or paying more than 50% of income on housing
costs in the state; and
! the relative number of very low-income renter households paying
more than 50% of income on rent in the state.
9 U.S. Congressional Budget Office, Cost Estimate: H.R. 3221, Housing and Economic
Recovery Act of 2008, July 23, 2008, p. 3, available at [http://www.cbo.gov/ftpdocs/
95xx/doc9597/hr3221.pdf], and Cost Estimate: Federal Housing Finance Regulatory
Reform Act of 2008, June 9, 2008, pp. 3, 5-6, available at [http://www.cbo.gov/ftpdocs/
93xx/doc9366/Senate_Housing.pdf].
10 The term “states” includes the fifty states, the District of Columbia, and the territories and
possessions of the United States, including Puerto Rico, the Northern Mariana Islands,
Guam, the Virgin Islands, American Samoa, and the Trust Territory of the Pacific Islands.

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The sum of these factors will then be multiplied by the relative cost of construction
in the state to arrive at a grant amount. Each state is to receive a minimum annual
grant of $3 million.11 Once states have received their formula grants, they can then
designate for-profit or non-profit organizations such as housing finance agencies,
housing and community development entities, or tribally designated entities to
administer the funds.
Grantees and sub-recipients can use grants from the Housing Trust Fund to
support both renter and home ownership housing activities. Grants can be used for
the production, preservation, rehabilitation, or operation of rental housing. By law,
all funding used for rental housing must benefit families that are extremely low- or
very low-income.12 At least 75% of the grant amounts for rental housing must be
used for the sole benefit of extremely low-income families or families with incomes
at or below the poverty line for a family of its size. No more than 25% of the grant
amounts for rental housing can be used for the sole benefit of very low-income
families.
Grants from the Housing Trust Fund may also be used for the production,
preservation, and rehabilitation of home ownership housing, or for related home
ownership costs such as down payment assistance, closing cost assistance, and
interest-rate buy-downs. By law, both the home and the home buyer must meet
certain requirements,13 and the funds must be used to benefit families who are
extremely low- or very low-income. No more than 10% of the Housing Trust Fund
formula grants allocated to a state may be used for home ownership activities.
The law contains a provision stating that if Congress creates any other
affordable housing trust fund in the future that is dedicated solely to providing grants
to support affordable rental and home ownership housing, the funds in the Housing
Trust Fund would be transferred to the new fund.
Capital Magnet Fund
The remaining 35% of the monies devoted to the affordable housing funds is to
be directed to the Capital Magnet Fund. The Capital Magnet Fund will be
administered by the Department of the Treasury’s existing Community Development
Financial Institutions Fund. The Secretary of the Treasury is to use the Capital
Magnet Fund to award competitive grants to community development financial
institutions (CDFIs) and qualified non-profit organizations. Community
11 The $3 million minimum grant amount applies only to the 50 states and the District of
Columbia.
12 As noted earlier, very low-income households are households that have an income at or
below 50% of area median income. Extremely low-income households have an income at
or below 30% of area median income.
13 The home must be available for purchase by extremely low- or very low-income families
who will use the home as a principal residence and are first-time home buyers, meaning that
they have not owned a home in the prior three years. Home buyers must also complete a
pre-purchase financial counseling requirement. The home is subject to initial purchase price
and resale restrictions.

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development financial institutions typically provide loans and financial services in
under-served neighborhoods. By law, non-profits receiving grants must have the
development or management of affordable housing as one of their principal purposes.
No recipient or its affiliates can receive more than 15% of the eligible grant money
available from the Capital Magnet Fund each year.
The Capital Magnet Fund is meant to leverage private capital and support for
investment in housing for low-, very low-, and extremely low-income households,
and to support investment in economic development activities and community
service facilities. Specifically, grants from the Capital Magnet Fund can be used to
develop, preserve, rehabilitate, or purchase affordable housing for low, very low-, or
extremely low-income families, and for economic development activities or
community service facilities such as day care centers or health clinics. Eligible uses
of grant money include capitalizing a revolving loan fund, an affordable housing
fund, or a fund to support economic development activities; providing loan loss
reserves; and providing risk-sharing loans. No single organization may receive more
than 15% of the grants available from the Capital Magnet Fund in a year. The
Secretary is directed to take into account geographic diversity and measures of
economic distress when awarding grants, and, in order to leverage the grant money,
to seek to fund projects that will have total costs that are at least ten times the grant
amount.
Restrictions on Use
Restriction on Eligible Activities. Money from either fund cannot be used
for political activities, advocacy, lobbying, counseling services, travel expenses, or
preparing or providing advice on tax returns. The Secretary can set a limit of up to
10% of a state or state-designated entity’s Housing Trust Fund grant amount that can
be used for the cost of administering the programs funded by the grant; using funds
for other outreach or other administrative costs of the grantee or fund recipient is
prohibited.
Restrictions on Sub-Recipients. As noted earlier, states can designate for-
profit or non-profit organizations such as housing finance agencies, housing and
community development entities, or tribally designated entities to administer the
formula grants from the Housing Trust Fund. The state or state-designated entity can
then award funds to sub-recipients. Sub-recipients of Housing Trust Fund grant
amounts must have relevant experience. More specifically, an organization receiving
funding for a rental housing project must have experience owning, constructing,
rehabilitating, managing, or operating affordable multifamily rental projects. An
organization receiving funding for home ownership is required to have experience
in designing, constructing, rehabilitating, or marketing affordable home ownership
housing, or providing assistance with down payments, closing costs, or interest rate
subsidies. Recipients also have to demonstrate general financial experience and
expertise and familiarity with the requirements of any related federal, state, or local
housing programs that will be used in conjunction with grants from the Housing
Trust Fund.
Recipients of grants from the Capital Magnet Fund must be community
development financial institutions certified by the Treasury or non-profit

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organizations with the development or management of affordable housing as a
principal purpose, according to the statute.
Requirements and Oversight. P.L. 110-289 requires states or the state-
designated entities that administer grants from the Housing Trust Fund to develop an
allocation plan that describes how the grant money will be distributed. The plan
must explain how the allocation of funds will be based on priority housing needs, and
it must include performance goals. The states and state-designated entities are to
make their allocation plans available for public comment and consider any public
comments they receive. Recipients of grants from the Capital Magnet Fund must
establish reporting and auditing requirements with the Capital Magnet Fund to ensure
that funds are properly used.
Grants from the affordable housing funds do not count toward the GSEs’
affordable housing goals or their duty to serve underserved markets. Projects that use
grants from the affordable housing funds can be counted towards these goals for the
portion of the project that does not use affordable housing fund grant money.
Any funds not committed for use by a grantee within two years will be
recaptured by the affordable housing funds and reallocated.
The grantees (states or state-designated entities in the case of the Housing Trust
Fund; grant recipients in the case of the Capital Magnet Fund) are responsible for
overseeing the proper use of the funds and obtaining reimbursement for improperly
used funds. Future grants are to be reduced by the amount of any unreimbursed
improperly used money.
Issues Surrounding GSE Contributions to the
Affordable Housing Funds
This section discusses the rationale for requiring GSEs to support the affordable
housing funds. It also discusses factors that could affect the GSE contributions to the
affordable housing funds, including the Director’s ability to suspend contributions
and the government takeover of Fannie Mae and Freddie Mac.
Why Should the GSEs Support an Affordable Housing Fund?
Few dispute that the GSEs have historically received substantial benefits from
their unique relationship with the federal government. There has been debate over
how the advantages of GSE status are divided among those who might benefit:
lenders, mortgage borrowers (and which borrowers), holders of the GSE bonds and
mortgage-backed securities, GSE stockholders, and GSE employees. Most analysts
believe that not all of the benefits have gone to borrowers.14
14 CRS Report RS22307, Limiting Fannie Mae’s and Freddie Mac’s Portfolio Size, by N.
Eric Weiss summarizes both sides of the arguments. For an example of a government
(continued...)

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The Fannie Mae and Freddie Mac charters state that the purposes of the
enterprises are as follows:
(1) to provide stability in the secondary market for residential mortgages;
(2) to respond appropriately to the private capital market;
(3) to provide ongoing assistance to the secondary market for residential
mortgages (including activities relating to mortgages on housing for low- and
moderate-income families involving a reasonable economic return that may be
less than the return earned on other activities) by increasing the liquidity of
mortgage investments and improving the distribution of investment capital
available for residential mortgage financing; and
(4) to promote access to mortgage credit throughout the nation (including central
cities, rural areas, and underserved areas) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for
residential mortgage financing.15
HUD has found that the GSEs are not leading the market in purchasing
mortgages on owner-occupied and rental affordable housing and on housing in
underserved areas as mentioned in their charters.16 This has led to calls for the GSEs
to purchase more mortgages that finance affordable housing and housing in
underserved areas, while balancing risk and profitability considerations.
P.L. 110-289 makes major changes to the GSEs that are aimed at addressing the
concern that they are not meeting the objectives laid out in their charters. Beginning
in 2010, P.L. 110-289 instructs the Director of FHFA to modify the GSEs’ annual
affordable housing goals to require the GSEs to purchase mortgages on homes for
three distinct categories of households: low-income families, very low-income
families, and families that reside in low-income areas. The prior housing goals
required the GSEs to set one target for the purchase of mortgage on homes owned or
rented by low- and moderate-income families. P.L. 110-289 does not distinguish
between the GSEs retaining a mortgage and selling it in a mortgage-backed security.
The establishment of the affordable housing funds is another change that is aimed at
14 (...continued)
analysis, see Andreas Lehnert, Wayne Passmore, and Shane M. Sherlund, GSEs, Mortgage
Rates, and Secondary Market Activities, Board of Governors of the Federal Reserve System,
Working Paper 2006-30, September 8, 2006. A contrasting view is presented in Freddie
Mac, The Systemic Risk Debate, 2007, available at [http://www.freddiemac.com/corporate/
about/policy/reg_reform/systemic_risk_debate.html].
15 The charter language setting the purpose for creating the enterprises is identical. Fannie
Mae’s language is at 12 U.S.C. 1716, P.L. 101-73, 103 Stat. 435; Freddie Mac’s language
is in P.L. 101-73, 103 Stat.429, 12 U.S.C. 1451 note. Both were amended by P.L. 102-550,
106 Stat. 3994 and 106 Stat. 4002.
16 Department of Housing and Urban Development, Regulatory Analysis for The Secretary
of HUD’s Final Rule on HUD’s Regulation of The Federal National Mortgage Association
(Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), Chapter
III. Available at [http://www.hud.gov/offices/hsg/gse/ra-chapter3.pdf].

CRS-11
addressing the GSEs’ affordable housing mission. The Housing Trust Fund is to
provide funds to attempt to increase the supply of owner-occupied and rental
affordable housing through grants. The Capital Magnet Fund is to also set aside
funds for CDFIs to support affordable housing and related economic development
activities.
Some of those opposed to the creation of GSE affordable housing funds argue
that it is unfair to require a privately owned company to balance the interests of
stockholders against public policy. Others opposed to the GSE affordable housing
funds are concerned that the funds would be another cost of doing business and that,
like other costs in any competitive market, they would be passed onto consumers
(mortgage borrowers in this case) or reduce dividends to stockholders. P.L. 110-289
includes language prohibiting the GSEs from passing on the cost of the housing
funds to others. However, in a market where mortgage interest rates, mortgage
terms, and home prices change as frequently as the mortgage market, it might be
difficult to identify the reason for a specific interest rate or price change. Finally,
concern over GSE portfolio risk taking has led some regulators and others to call for
limits on the size of the GSEs’ portfolios; some GSE affordable housing fund
opponents have argued that using GSE contributions to support affordable housing
funds could give proponents of the funds an incentive to encourage GSE growth
beyond what is financially sound.
Current Issues
Financial Uncertainty. With increases in mortgage delinquencies since the
middle of 2007, the GSEs’ capital positions have deteriorated. The GSEs’ regulator
found both GSEs adequately capitalized during each quarter of 2007, but noted
significant declines in the amount of capital held as a percentage of that required by
their regulator. In November and December 2007, Fannie Mae increased its capital
by selling $7.9 billion in preferred stock, and Freddie Mac sold $6 billion in preferred
stock. Fannie Mae raised an additional $7.4 billion in new capital in May 2008.17
These actions were widely viewed as motivated by losses on mortgages that the
GSEs had guaranteed.
This raises the issue of under what circumstances the GSEs’ contributions to the
affordable housing funds could be suspended. P.L. 110-289 requires the Director of
FHFA, the GSEs’ new unified regulator, to temporarily suspend contributions by
either GSE if he finds that the contributions (1) are contributing or would contribute
to financial instability, (2) are causing or would cause a GSE to be classified as
undercapitalized, or (3) are preventing or would prevent a GSE from successfully
completing a capital restoration project. However, the legislation does not define
how long a “temporary” suspension could last, nor does it specify criteria for the
Director to rely on in making such a finding.
17 Office of Federal Housing Enterprise Oversight, “Report to Congress: 2008”, April 15,
2008, pp. 2, 31, 51, available at [http://www.ofheo.gov/media/annualreports/Reportto
Congress2008.pdf], and “OFHEO Announces First Quarter 2008 Minimum and Risk-Based
Capital Classification for Fannie Mae and Freddie Mac,” press release, June 9, 2008,
available at [http://www.ofheo.gov/media/capclass/1Q2008CapClass.pdf].

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Conservatorship. P.L. 110-289 also gave the Director of FHFA temporary
emergency authority to take over the GSEs if he determined that such an action was
necessary to protect taxpayers, stabilize financial markets, and prevent disruptions
in mortgage availability. On September 7, 2008, FHFA decided to exercise that
authority and placed both Fannie Mae and Freddie Mac under its conservatorship.18
This move could affect the affordable housing funds in two ways.
First, as discussed above, the legislation requires the Director of FHFA to
suspend contributions to the affordable housing funds in the case of GSE financial
trouble. At the time the GSEs were placed under conservatorship, they were
generally believed to face uncertain financial futures. On November 13, 2008, FHFA
informed Fannie Mae that it should suspend its contributions until further notice.19
This suspension of contributions will not directly affect the affordable housing funds
until they are set to begin receiving allocations in FY2010, because all of the GSE
contributions in FY2009 were slated to go to the HOPE for Homeowners program
discussed earlier.
Second, the long-term plan for the GSEs remains unclear, but some
policymakers have stated that the GSEs’ portfolios should be forced to shrink
beginning in 2010. The amount of the GSEs’ contributions to the affordable housing
funds is based on the volume of their new business purchases, not on the size of their
portfolios. However, if shrinking the size of GSEs’ portfolios leads the GSEs to
purchase a smaller volume of mortgages, then the affordable housing funds could
receive less funding than originally believed. Alternatively, the GSEs could continue
to maintain or increase their volume of new business purchases, but still shrink their
portfolios by packaging the mortgages they buy and selling them as mortgage-backed
securities to other investors. This scenario would not reduce contributions to the
affordable housing funds. The legislation allows the Housing Trust Fund and the
Capital Magnet Fund to receive funding from sources other than the GSE
contributions, but as of the time when Fannie and Freddie were placed under
conservatorship, the GSE contributions were the only identified funding source for
either the Housing Trust Fund or the Capital Magnet Fund.
As noted above, the affordable housing funds are not due to begin receiving
contributions until FY2010. In FY2010 and FY2011, a decreasing percentage of the
GSE contributions is to continue to fund HOPE for Homeowners. Because the
affordable housing funds share the contributions with HOPE for Homeowners in the
first three years, any decrease in GSE contributions would lead to even less money
for the affordable housing funds. However, because the affordable housing funds do
not receive funding in the first year, it is possible that the GSEs’ financial outlook
would have improved by the time the affordable housings funds are due to begin
receiving allocations in FY2010.
18 See CRS Report RS22950, Fannie Mae and Freddie Mac in Conservatorship, by Mark
Jickling for a fuller discussion of the details of the conservatorship.
19 United States Securities and Exchange Commission filing, Form 8-K, Federal National
Mortgage Association, November 18, 2008, available at [http://www.sec.gov/Archives/
edgar/data/310522/000129993308005442/htm_30041.htm].

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Appendix 1. Legislative History of
Housing Trust Fund Bills
Proposals to create an affordable housing trust fund have been included in
legislation in every Congress since the 106th. This report has described the provisions
of the two GSE affordable housing funds as they were authorized by P.L. 110-289.
This appendix discusses the major features of previous housing trust fund proposals.
106th Congress
In the 106th Congress, Senator John Kerry and ten co-sponsors introduced S.
2997, the National Affordable Housing Trust Fund Act of 2000. This bill would
have both established a National Affordable Housing Trust Fund within the
Department of the Treasury and provided a dedicated funding source for the Fund.
The dedicated funding source would have come from FHA Mutual Mortgage
Insurance (MMI) funds above a capital adequacy level of 3%, as well as any excess
funds from Ginnie Mae. Hearings on the bill were held by the Subcommittee on
Housing and Transportation of the Committee on Banking, Housing, and Urban
Affairs.
107th Congress
In the 107th Congress, Senator John Kerry and 28 co-sponsors introduced S.
1248, the National Affordable Housing Trust Fund Act of 2001. Like S. 2997, this
bill would have authorized a trust fund and proposed the same dedicated funding
source of FHA MMI funds above a capital adequacy level set at 3% and any excess
funds from Ginnie Mae. Again, subcommittee hearings were held, but the bill was
never sent to the full committee. In the House, Representative Bernie Sanders and
199 co-sponsors introduced H.R. 2349, also called the National Affordable Housing
Trust Fund Act of 2001. This bill proposed using the same dedicated funding source
of excess Ginnie Mae funds and FHA MMI funds above a capital adequacy level, but
it set the capital adequacy level at 2% rather than 3%. The bill was referred to the
Subcommittee on Housing and Community Opportunity, but hearings were never
held.
108th Congress
In the 108th Congress, Senator John Kerry and 21 co-sponsors introduced S.
1411, the National Affordable Housing Trust Fund Act of 2003. The bill proposed
the same dedicated source of funding as S. 2997 and S. 1248. S. 1411 was referred
to the Committee on Banking, Housing, and Urban Affairs, but the Committee never
held hearings on it. Also in the 108th Congress, the Reed Affordable Housing Fund
amendment to S. 1508, a GSE reform bill, was unanimously adopted by the Senate
Banking Committee. This amendment proposed a dedicated funding source of 5%
of Fannie Mae’s and Freddie Mac’s pre-tax profits. In the House, Representive
Bernie Sanders and 214 co-sponsors introduced H.R. 1102, also the National
Affordable Housing Trust Fund Act of 2003. This bill also included both authorizing
and appropriating language and specified a dedicated source of funding that was the
same as H.R. 2349 (and the same as the Senate bills, but setting the FHA MMI fund

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capital adequacy level at 2% rather than 3%). The bill was referred to the
Subcommittee on Housing and Community Opportunity, but hearings were never
held.
109th Congress
In the 109th Congress, proponents of an affordable housing fund concentrated
their efforts on including an affordable housing fund in H.R. 1461, the Federal
Housing Finance Reform Act of 2005. The bill would have required each GSE to
create an affordable housing fund and to contribute either 3.5% or 5% of the prior
year’s after-tax income depending on the year. The bill included a sunset provision
after five years, after which the GSEs would no longer have been required to make
contributions. The bill was referred to the Senate Committee on Banking, Housing,
and Urban Affairs.
110th Congress
In the 110th Congress, Representative Barney Frank and three co-sponsors
introduced H.R. 1427, the Federal Housing Finance Reform Act of 2007, on March
9, 2007. The bill authorized the creation of a trust fund and directed the GSEs to
contribute 1.2 basis points for each dollar of their average total mortgage portfolio
for five years, at which point the funding requirement would have ended. H.R. 1427
passed the House and was referred to the Senate Committee on Banking, Housing,
and Urban Affairs.
Representative Maxine Waters and 13 co-sponsors introduced H.R. 1852, the
Expanding American Homeownership Act of 2007, on March 29, 2007. The bill
passed the House and was referred to the Senate Committee on Banking, Housing,
and Urban Affairs. H.R. 1852 would have set aside a portion of FHA savings for a
housing trust fund.
Representative Barney Frank and 16 co-sponsors introduced H.R. 2895, the
National Affordable Housing Trust Fund Act of 2007, on June 28, 2007. H.R. 2895
was passed by the House and referred to the Senate Committee on Banking, Housing,
and Urban Affairs. The bill would have created a permanent affordable housing trust
fund and included guidance on how trust fund grantees should use the funds, but it
did not create a permanent funding source.
Senator Jack Reed introduced S. 2391, the Government Sponsored Enterprise
Mission Improvement Act, on November 16, 2007. The bill would have established
an affordable housing block grant program and a Capital Magnet Fund and would
have funded both through GSE contributions of 4.2 basis points for each dollar of the
unpaid principal balance of their total new business purchases. The bill did not
include a sunset provision. S. 2391 was referred to the Committee on Banking,
Housing, and Urban Affairs.
Senator John Kerry and 23 co-sponsors introduced S. 2523, the National
Affordable Housing Trust Fund Act of 2007, on December 19, 2007. The bill would
have established a national affordable housing trust fund but would not have created

CRS-15
a dedicated funding source. S. 2523 was referred to the Committee on Banking,
Housing, and Urban Affairs.
Representative Nancy Pelosi and 18 co-sponsors introduced H.R. 3221, the
Housing and Economic Recovery Act of 2008, on July 30, 2007. This is the
legislation that eventually became P.L. 110-289 and both authorized the affordable
housing funds and created a permanent source of money for those funds. The version
of the affordable housing trust fund that was created by P.L. 110-289 most resembles
the proposed fund in S. 2391.