One of the most controversial elements delaying GSE reform legislation is the provision in the bill approved by the House Financial Services Committee that would direct 5% of Fannie Mae and Freddie Mac profits to an affordable-housing fund.
Advocates of affordable housing support this provision avidly. Critics say they fear it would create a formidable centralized slush fund for Fannie and Freddie to organize political support for their allies and reward them financially.
Given the GSEs’ long history of using financial power to enhance their political clout and using political clout to enhance their economic advantages, this fear is not unreasonable.
In response, supporters of the 5% provision point to the success of the Federal Home Loan banks’ affordable-housing program. That program, mandated by the thrift bailout legislation of 1989, requires that 10% of profits go to affordable-housing projects. Though it was controversial at the time, no one opposes it now; it is universally described as a major success.
Why shouldn’t the program proposed for Fannie and Freddie work as well? Because they are not the same: indeed they are in basic structure opposites. The Fannie and Freddie programs would be top-down, national, and centralized. The Home Loan bank program is by nature bottom-up, locally based, and decentralized--and that is what has led to its success.
In the Home Loan bank program, member financial institutions propose the projects as parts of their own community outreach programs, in cooperation with nonprofit partners they choose. The individual Home Loan banks fund and administer the projects in their respective regions.
Each Home Loan bank has its own member institutions and management. The 12 Home Loan banks can never, for any purpose, agree on a unified political agenda, let alone implement one.
That is why their affordable-housing program cannot become a political slush fund.
Couldn’t the Fannie and Freddie’s programs be given a similar structure? Yes, and the solution is extraordinarily simple: Give their 5% contributions to the Home Loan banks to disburse and administer.
The cost to Fannie and Freddie would be the same. The slush-fund problem would disappear. Affordable housing would be well served. We would build on success and existing non-political infrastructure. Local financial institutions would be even more involved in community development.
Everybody would be happy.
Alex J. Pollock is a resident fellow at AEI.