Should Fannie and Freddie Fund Housing for the Poor?

Developer Nora Lichtash wants to turn a weed-covered lot in Philadelphia’s working-class Port Richmond neighborhood into a block of rental homes affordable to families making less than $20,000 a year.

After three years of cobbling together loans and subsidies, Lichtash’s nonprofit group is still short of financing. She could try to tap a special federal fund meant to help provide housing for the poor -- if there were any money in the account.

The Affordable Housing Trust Fund is empty because shortly after Congress set it up in 2008, the companies that were supposed to fund it -- Fannie Mae and Freddie Mac -- were seized by the government. Now there is renewed pressure from housing advocates and Democrats in Congress to revive a program that could generate hundreds of millions of dollars a year.

“It would make a huge difference if there were real trust-fund dollars,” said Lichtash, director of the Women’s Community Revitalization Project, which hopes to build homes with rents as low as $450 a month. “It would fill in the gap for the other sources of funding.”

The Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, barred the companies five years ago from paying into the fund, citing their precarious financial condition. Now that the mortgage financiers are posting record profits, it’s time to reverse that decision, a group of 33 U.S. senators wrote in a January letter to Melvin L. Watt, who had just become head of the FHFA.

$382 Million

Housing groups last year sued FHFA in federal court, contending that the continued suspension of payments violates the law that created the trust fund. The statute requires Fannie Mae (FNMA) and Freddie Mac to set aside less than 1 percent of revenue from new business, an amount that would have reached $382 million in 2012, according to the lawsuit. Fannie Mae and Freddie Mac reported a combined profit of $28 billion that year.

“We saw that Fannie and Freddie were both coming back, in fact roaring back, and all this money was going to the federal Treasury and there was just no justification for not putting aside some of that money, which at this point is so small compared to the amount that has gone to the Treasury,” said Charles Elsesser, a Florida legal aid lawyer who filed the suit on behalf of the National Low Income Housing Coalition.

Federal subsidies for low-income housing haven’t kept pace with the growing need, according to Harvard University’s Joint Center for Housing Studies. Family incomes have fallen while the supply of rentals has remained flat, contributing to a shortage of 4.9 million rentals for families making less than about $19,000 a year in 2011, up from a gap of 1.9 million in 2007, the center reported in December.

Taxpayer Interests

Edward J. DeMarco, who was FHFA’s acting director before Watt took over, blocked payments into the fund even as Fannie Mae and Freddie Mac became profitable, saying he was protecting the interests of taxpayers.

Housing groups say they are optimistic they will have a more sympathetic ear in Watt, who was broadly supportive of affordable housing policies during his two decades as a Democratic House member from North Carolina.

Denise Dunckel, an FHFA spokeswoman, said the housing fund is among the matters being reviewed by Watt.

Other U.S. housing subsidies that have been used to bring down rents have been cut during federal budget-tightening in recent years. For example, the HOME Investment Partnerships, which give block grants to states, was cut in half to less than $1 billion annually after news media and congressional probes revealed that many funded projects weren’t being built.

Seeking Repeal

Flaws in such programs have long stirred opposition among some Republicans who say that producing homes for low-income people is a mission better handled by private interests than by government subsidies. Republicans in the House of Representatives have tried unsuccessfully to repeal the authorization for the affordable housing trust fund.

“What we have is an enormous number of these types of funds and there’s virtually no accountability for how well they work,” said Norbert J. Michel, a research fellow at the Heritage Foundation, which supports limited government.

Fourteen Republican senators sent Watt a letter yesterday asking him not to allow contributions to the trust fund. “If Watt is going to fulfill promises he made during the confirmation process to protect taxpayers, he will continue the common sense suspension of contributions,” wrote Senator David Vitter of Louisiana, the author of the letter.

High Demand

The primary existing U.S program for affordable housing is the Low Income Housing Tax Credit, which allows state agencies to award projects about $8 billion in federal tax write-offs each year. Developers sell the credits to investors in exchange for equity in the projects. For-profit and nonprofit developers are producing about 100,000 affordable rental units annually through the program.

Developer demand for the tax credits far outstrips the supply. In Pennsylvania, the state housing finance agency received 121 applications for $116.6 million in tax credits last year, and approved 37 developments with a total of $36.3 million in credits. Lichtash’s Philadelphia development was among projects approved so far this year.

“You don’t put in an application unless you’re really serious,” said Liz Hersh, director of the Housing Alliance of Pennsylvania. “You have to have a site, financing, investors and community support. The fact that they were able to do only 30 or 40 percent is pretty dramatic.”

‘Large Gap’

Not all of the tax-credit units are accessible to the poorest families; developers must layer on other subsidies to ensure families making less than $20,000 annually are spending no more than a third of their income on rent, the government standard for affordability. That’s where the trust fund comes in. It would funnel money to the states and would be the only source of federal dollars specifically targeted for housing for the lowest-income families.

“There is still in most markets a large gap between what you can reasonably finance based on the rents you can charge to occupants,” said Andrew Jakabovics, senior director of policy development at Enterprise Community Partners, a nonprofit affordable housing investment company. “As other sources of gap financing dry up, the need to augment it is increasing.”

Factory Enclave

In Port Richmond, an enclave of industrial buildings and narrow brick row houses along the Delaware River that was settled by Polish immigrants a century ago, Lichtash’s group plans to build 36 town homes and apartments on a block near some auto body shops and warehouses. The $13 million project would be the group’s 10th housing development in the city. Its most recent, a 40-unit project in North Philadelphia, drew at least 30 applicants per slot when it opened in 2011, Lichtash said.

In addition to the tax credits, the Port Richmond project obtained a $500,000 grant from the Federal Home Loan Bank in Pittsburgh. Still, there’s a gap in the funding, Lichtash said.

The trust fund “is the exact kind of thing we could have applied to” to finish the project, she said.

Even if Fannie Mae and Freddie Mac (FMCC) began paying into the fund, it’s unclear how long that could last. Congress is working on legislation that would wind them down and replace them. Advocates are pushing for alternative sources of funding for low-income housing in any new system that’s created.

Until then, said Sheila Crowley, president of the housing coalition, the companies have an obligation to pay.

“We are very hopeful that when Mr. Watt catches his breath and finds his way around the building, this will be at the top of his agenda,” Crowley said. “I know he will give this a very thorough examination.”

The law clearly requires Fannie Mae and Freddie Mac to put the money aside, she said.

“This is an expense that they have to pay,” she said. “Just as they have to pay their light bill, this is an expense of doing business.”

To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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