Fannie Mae ( FNM) and Freddie Mac ( FRE) shareholders were wiped out after a federal government takeover last month, but that hasn't stopped lawmakers from skimming profits from the mortgage giants to fund possibly redundant housing programs. The main aim of the housing bill passed by both houses of Congress in July was to reform oversight of Fannie and Freddie. But it also slipped in some pet projects for lawmakers, including the Housing Trust Fund, advocated since 2005 by Rep. Barney Frank (D., Mass.). The program calls on Fannie and Freddie to provide grants in support of affordable housing issues. The legislation directs 5% of the profits from any new business at Fannie and Freddie to the fund. The bill also called for 4.2 basis points of that sum to be directed to a new program called Hope for Homeowners, which will be meant to provide aid to homeowners facing foreclosure.
But the world has changed since the program was created, raising questions about whether it should exist at all. In September, Fannie and Freddie were seized by the federal government and placed in conservatorship, cutting their dividends and wiping out shareholders of the two companies. Moreover, it seemed to some long-time critics that the program was redundant. "Why put a tax on the GSEs to make homes more affordable when that was their mission anyway?" asked Leslie Paige of Citizen's Against Taxpayer Waste. Steve Adamske, a spokesman for Frank, defended the fund and the Hope for Homeowners program, saying they are consistent with the GSEs' mission to encourage home ownership. And despite the existence of other government programs to aid troubled borrowers, Hope for Homeowners fills certain gaps in coverage.
For example, there is already an existing loan program called FHA Secure that will help homeowners that got steered into high cost loans with teaser rates. These homeowners get a lifeline if they can't adjust to new, much higher payments. But Adamske said that the FHA Secure loan has limit, in that it can't rework loans that are 60 to 90 days late. "They tried to deal with this limitation administratively, but ultimately they need a statutory change, and that is what we did with Hope for Homeowners," he says. The Housing Trust Fund doles out the money it receives from the GSEs as grants to assist in affordable housing issues. The program, estimated at one time to be roughly $500 million, had ambiguous goals, and was viewed by critics as a "slush fund" with very little oversight. It was expected to divert money to community groups like the embattled ACORN, which has come under attack by Republicans in the presidential campaign for allegedly fraudulent get-out-the-vote practices. The trust fund was originally intended to increase homeownership for low- and very low-income families. Now federal officials are looking at using the fund to provide assistance in rental housing. The Hope For Homeowners program aims to provide a 30-year fixed income mortgages for homeowners facing foreclosure. The mortgage's debt-to-income ratio can't exceed 31% and had to have been originated before 2008, among other guidelines. The existing lender has to agree to release the mortgage and will receive 90% of the home's appraised value.
The lifeline has a potentially high cost. Any future appreciation in the value of the home or any equity created at the beginning of the new mortgage has to be shared with the government. Federal Housing Finance Agency Director James Lockhart, who oversees Fannie and Freddie, said the Hope for Homeowners funds will be allocated unless it affects the capitalization of the GSEs. Besides, if Fannie and Freddie don't make the payments, the Treasury will. In fact, the Treasury has already issued $29.5 million in Hope Bonds to fund the start-up. But it isn't clear why an additional program is necessary. Lockhart said in Sept. 25 testimony to Congress that Fannie and Freddie would be allowed to increase their portfolios up to $850 billion over the next 15 months. Isn't that enough money to provide for these loans without the 4.2-basis point haircut? Moreover, the federal government is now considering using funds from the $700 billion Troubled Asset Relief Program, or TARP, approved by Congress earlier this month to buy up and rework mortgages for troubled borrowers, The Wall Street Journal reported on Oct. 23. The Bush administration also is mulling a $40 billion plan to provide lenders financial incentives to rework unaffordable home loans, the Journal said. Secondly, how did this item remain in the GSE reform package as late as July, when Fannie and Freddie were fighting for their very survival and the housing landscape had changed dramatically? Paige's concern is that these programs are creating new government expenditures that will be difficult to get rid of once the current crisis is massed. "Once a program gets started, it never goes away," she said. "It's like a weed. I can count on one hand the number of government programs that ever get shut down, once begun." The shareholders of Fannie Mae haven't been asked whether that 5% or that 4.2-basis points could be used elsewhere. They may prefer that money to go toward the dividends that were cut. Sadly, there is no hope for Fannie Mae shareholders.