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**Q&A on the GSE Bill**

*May 2007*

In light of the House's consideration of H.R. 1427---Federal Housing
Finance Reform Act, it might be useful to consider the arguments that
proponents of the legislation may assert on the House floor.

**Fannie Mae and Freddie Mac are government-sponsored enterprises
(GSEs), so doesn't that mean the federal government can do whatever it
wants to them?**

-   [No]{.underline}. GSEs are privately owned, congressionally
    chartered financial institutions created to enhance the availability
    of credit for home mortgages. They have stockholders and fiduciary
    duties.

**So then they're just like any other publicly traded company?**

-   [No]{.underline}. Fannie Mae and Freddie Mac's charter came with
    significant government subsidies not enjoyed by their private sector
    competitors, including a \$2.3 billion line of credit with the U.S.
    Treasury (i.e., borrowing at below-market rates), an exemption from
    state and local taxes, and an exemption from certain Securities and
    Exchange Commission (SEC) registration requirements (including fees
    as publicly traded companies).

**All these benefits and they still had financial troubles?**

-   [Yes]{.underline}. In 2003, Freddie Mac admitted that it had used
    improper accounting policies to create the appearance of steady
    earnings growth and issued a restatement of financial results. In
    2004, the Department of Housing and Urban Development (HUD) issued a
    public report that was highly critical of accounting methods at
    Fannie Mae.

**So, is there anything Congress can do?**

-   [Yes]{.underline}. Many lawmakers and analysts have concluded that
    the current regulatory framework governing the GSEs is inadequate,
    allowing GSEs to expand its operations into arenas far beyond their
    charter. H.R. 1427 is an attempt to provide a stronger regulatory
    framework to refocus the GSEs and prevent future accounting
    shenanigans.

**Are conservatives on board with this approach?**

-   [Yes]{.underline}. Most conservatives are supportive of moving the
    regulatory oversight responsibilities for the GSEs from HUD to any
    independent agency with increased regulatory gusto.

**Are there any flaws with H.R. 1427 about which some conservatives may
be concerned?**

-   [Yes]{.underline}. There are several provisions in H.R. 1427 about
    which some conservatives are quite concerned. For example, some
    conservatives are concerned about the increased conforming loan
    limit for high-cost areas (because it takes the focus of GSEs off
    affordable housing). However, the main concern of most conservatives
    is the Affordable Housing Fund.

**Would the Fund just help people make downpayments on homes?**

-   [No]{.underline}. The Fund would provide formula grants to increase
    homeownership for extremely low- and very low-income families,
    increase investment in housing in low-income and chronically
    distressed areas, increase and preserve the supply of rental and
    owner-occupied hosing for extremely low- and very low-income
    families, increase investment in public infrastructure development
    related to this housing above, and leverage investments from other
    sources in affordable housing and in public infrastructure
    development.

**Would the Affordable Housing Fund be capitalized by voluntary
donations?**

-   [No]{.underline}. The Affordable Housing Fund would be funded by
    mandatory assessments against GSEs. Each GSE would have to pay 1.2
    cents per \$100 of the value of its mortgage portfolio from the
    preceding year into the Fund every year.

**Isn't that essentially a tax on consumers?**

-   [Yes]{.underline}.

**The grants would go directly to organizations who work on housing
issues, right?**

-   [No]{.underline}. The grants would first go to states and Indian
    tribes. Then they would have to make grants to housing entities.

**But just to local government agencies or small nonprofits really
hurting for cash, right?**

-   [No]{.underline}. Grant funds could be provided to organizations,
    agencies, or entities (including for-profit, non-profit, or
    faith-based entities) with a demonstrated capacity for carrying out
    eligible housing activities, and that make assurances to the grantee
    (as required by the regulator) that they will comply with the
    requirements of the program. There is no requirement that grant
    recipients be struggling in any way.

**Could grant recipients use the funds for political activities, like
voter registration and lobbying?**

-   [Yes]{.underline}. While the bill does prohibit the use of these
    grant funds for political activities, advocacy, lobbying, etc., many
    conservatives in the past have expressed concerns that the Fund
    could still be used by liberal entities to displace other funds.
    Money is fungible, so that if a group cannot use Fund grants for
    political activities, it could certainly have more money freed up
    for political activities because of the injection of Fund grants.

**What do you mean?**

-   Did you ever have a family member give you a gift of money and ask
    that you buy something special with it? For example, if your parents
    give you \$100 for your birthday and say that this money is not to
    pay your gas bill, yet you deposit the money in your bank and then
    write a \$100 check to your gas company, have you used the gift
    money to pay your gas bill? Maybe, or maybe not. More importantly,
    does it matter? The gift money unquestionably offset your other
    expenditures. Perhaps you didn't use the gifted \$100 to pay your
    bill, but you now have \$100 extra to buy other things.

**Should I worry that some housing organization will have its spending
offset by some additional grants?**

-   [Yes]{.underline}. The largest organizations (and thus the most able
    to commit resources to apply for federal grants) who work on
    affordable housing issues include, for example, ACORN (led voter
    registration efforts against Republicans, with allegations of voter
    fraud in Florida, Ohio, and North Carolina), National Council of La
    Raza (allegations of voter fraud in the Bob Dornan-Loretta Sanchez
    election of 1996), and Housing Works (led a demonstration against
    Senator Rick Santorum for his anti-needle exchange and
    pro-abstinence voting record). These entities unquestionably, and
    sometimes unabashedly, engage in partisan, liberal political
    activities.

[]{.mark}

**Can these groups move money around between political and non-political
activities?\
**

-   [Yes]{.underline}. For example, ACORN, the Association of Community
    Organizations for Reform Now, is actually an umbrella organization
    for more than 75 entities, most of which are run out of a single
    office in New Orleans. Among these entities are
    [unions]{.underline}, schools, radio stations, home mortgage
    counseling centers, tax advising centers, voter-mobilization
    organizations, lobbying firms, and even a furniture company.
    Estimates of ACORN's annual operation budget range from 30 to 40
    [million]{.underline} dollars. The Employment Policies Institute
    reports that large amounts of money move back and forth from various
    elements of the ACORN network all the time.
    <http://www.rottenacorn.com/>.

**Have conservatives opposed the Affordable Housing Fund before?**

-   [Yes]{.underline}. Back in 2005, House conservatives sent this
    letter in opposition to the Fund:
    [[http://www.house.gov/hensarling/rsc/doc/GSE%20slush%20fund.pdf]{.underline}](http://www.house.gov/hensarling/rsc/doc/GSE slush fund.pdf).

**Would the Fund ever go away?**

-   [No]{.underline}. Technically, the Fund is only authorized through
    and including fiscal year 2011, but the bill contains provisions for
    the continuation of the Fund and for the permanent existence of some
    as-yet-uncreated successor fund. Plus, when has a government program
    like this actually gone away?

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718