GSE Lawsuit Rulings Could Clear Way for National Housing Trust Fund, Capital Magnet Fund

Published by Michael Novogradac on Tuesday, October 21, 2014 - 12:00am

Two major lawsuits involving Fannie Mae and Freddie Mac ruled on recently could affect the director of the Federal Housing Finance Agency (FHFA) Mel L. Watts’ decision to lift the suspension on government sponsored entities (GSEs) Fannie Mae and Freddie Mac contributions to the National Housing Trust Fund (NHTF) and Capital Magnet Fund (CMF).

The Housing and Economic Recovery Act of 2008 required Fannie Mae and Freddie Mac to contribute to the NHTF and the CMF, but in December 2008 the FHFA suspended contributions, citing concerns about the GSEs’ fiscal solvency. Contributions remain suspended, but affordable housing advocates hope that the FHFA’s new director, who is “studying the issue,” will soon capitalize the NHTF and CMF.

The first of the two recent rulings that could affect Watts’ decision was against the hedge fund Perry Capital in Perry Capital v. Lew, upholding the Treasury’s “dividend sweep” in 2012 that resulted in a significant portion of Fannie and Freddie profits going to the Treasury. The FHFA lifting the suspension before the ruling could have prejudiced the case, because it would involve disbursing money while disregarding the investors’ claim to a portion of that income. As such, the Perry Capital v. Lew ruling clears the way for the director to lift the suspension.

Another recent federal ruling may also affect the possibility of Fannie Mae and Freddie Mac contributions to NHTF and CMF. In Samuels v. Federal Housing Finance Agency,the National Low Income Housing Coalition (NLIHC) sued the FHFA to force the agency to lift the suspension and direct Fannie Mae and Freddie Mac to provide funding to the NHTF and CMF. The judge’s decision against the NLIHC means the director won’t be forced to immediately lift the suspension. This leaves the timing of when contributions will begin uncertain. On the other hand, the potential end to the lawsuit—contingent on appeal—also clears the way for FHFA to act.

These legal disputes are important because the CMF and the NHTF are important to the affordable housing community. Both funds could support affordable housing and community development, helping to provide gap financing for low-income housing tax credit (LIHTC) projects at a time when many such sources are drying up.

Much conversation has focused on when Fannie and Freddie should begin contributing to the NHTF and CMF, but it is also critical to discuss how much they will contribute. The NLIHC estimates that the NHTF would’ve received about $390 million in 2012 if the suspension had been lifted. If the actual sum is significantly larger or significantly smaller than the affordable housing community expects it to be, that would significantly affect planning and decisions. A larger than expected contribution would allow developers and syndicators to expand affordable housing development plans. A smaller than expected contribution would increase the urgency of affordable housing advocates’ efforts to push for alternative sources of NHTF and CMF funding.

Unfortunately, based on the last four quarters of Securities and Exchange Commission filings by Fannie and Freddie, the contribution is likely to be smaller than previously expected by some affordable housing advocates. If Fannie and Freddie had contributed 4.2 basis points of their new business purchases over the past four quarters, as required by the Housing and Economic Recovery Act of 2008, the NHTF would’ve received almost $266 million in contributions and the CMF would’ve received a little more than $143 million in contributions. The total contributions to both funds for those four quarters would have been a little less than $400 million. The NHTF contributions would have been almost 35 percent smaller than the NLIHC’s most recent estimates. This shortfall suggests that while resuming Fannie and Freddie contributions to the NHTF and the CMF should remain an important priority for affordable housing advocates, this funding won’t be as beneficial to affordable housing as they might have hoped.

Developers, syndicators and investors should adjust their affordable housing development and investment plans to meet these more modest expectations of funding. Supporters should continue to push for other measures critical to expanding affordable housing, such as expanding the LIHTC and housing finance reform legislation like S. 1217, the Johnson-Crapo Housing Finance Reform and Taxpayer Protection Act, which, if enacted, is estimated to provide $5 billion annually for the NHTF, CMF and the proposed Market Access Fund.

 Note: Updates estimated totals for NHTF and CMF.