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Lawmaker Introduces Bill To Prohibit GSEs from Funding Housing Groups

Representative Ed Royce [1]U.S. Representative Ed Royce [2] (R-California), a senior member of the House Financial Services Committee [3] and a member of the Capital Markets and GSE Subcommittee and the Housing and Insurance Subcommittee, has introduced the Pay Back the Taxpayers Act of 2015 [4], according to an announcement [5] on Royce's website.

The bill prohibits the diversion of Fannie Mae and Freddie Mac funds into the Housing Trust Fund and Capital Magnet Fund. Royce and other Republicans have been highly critical of Federal Housing Finance Agency Director Mel Watt's decision last month to lift suspension of the allocation of GSE funds into the housing groups, saying it violates the language of the Housing and Economic Recovery Act of 2008 and puts taxpayers at further risk. Progressives have praised Watt's decision, saying it creates more homeownership opportunities, especially for low-income Americans.

Royce was in Washington, D.C. on Tuesday for the House Financial Services Committee hearing entitled "Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency," where he questioned Watt for five minutes [6] on the subject of diversion of GSE funds into the housing groups. After presenting data that showed Fannie Mae and Freddie Mac to be overleveraged and undercapitalized, Royce told Watt during his five-minute questioning period that it was "difficult to see how you can argue that as it is required by law, the GSEs are financially stable enough to begin the transfer of money to housing groups."

The housing groups were created in 2008 as part of the Housing and Economic Recovery Act, but funding of the groups was suspended shortly after the government seized control of Fannie Mae and Freddie Mac in September 2008. The government provided the enterprises with a combined $188 billion bailout shortly thereafter. Current law requires FHFA to suspend the allocation of GSE funds to housing groups if payments would contribute to the financial instability of the GSEs, cause the enterprises to be undercapitalized, or prevent the enterprises from successfully completing a capital restoration plan.

"We've put in place prudential stops if circumstances go back in the other direction," Watt said in response to Royce's questioning on Tuesday. "If we ever have a draw on the Treasury, that would automatically stop funding of the Housing Trust Fund. When Fannie and Freddie were put into conservatorship, and the preferred stock agreements were entered into with Treasury, that suspended the capital of Fannie and Freddie. Now, if we were building up capital, I understand exactly what you're saying. But those two criteria don't apply anymore because they are in conservatorship. Every dime is going to the taxpayers if there is a profit."

Royce concluded his questioning period of Watt by stating that he and his colleagues planned to introduce the Pay Back the Taxpayers Act that day. The bill states that no funds from the GSEs can be used to fund the Housing Trust Fund or the Capital Magnet Fund while the GSEs are in conservatorship or receivership and requires that any payments already allocated or set aside should instead be used to reduce the deficit.

"We heard directly today from Fannie and Freddie's regulator that while they remain under-capitalized and over-leveraged, it is the right time to start siphoning money away from these taxpayer-backed GSEs to questionable housing groups," Royce said. "Anyone who witnessed the financial crisis knows exactly how this will play out. A larger government presence in housing distorts the market and promotes a boom-and-bust cycle that leaves taxpayers holding the bag. Coupled with the recent decision by the FHA to reduce mortgage premiums, it appears that the Administration is taking us in the complete wrong direction when it comes to stabilizing housing markets. The Pay Back the Taxpayers Act will preempt payments from the GSEs to housing advocacy groups and instead reroutes them where they belong: with the taxpayers."