FHLBs Now Sing Praise of Housing Set-Asides: Would a Similar Fund for Fannie, Freddie Be Solution or Socialism?

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WASHINGTON -- To listen to Federal Home Loan bank executives discuss the affordable-housing program now, it would be easy to think they always supported it.

When it was created in 1989 after the savings and loan scandal, the idea of setting aside 10% of their annual earnings for housing projects was hardly popular. But as Congress debates a similar program for Fannie Mae and Freddie Mac in a regulatory overhaul of the government-sponsored enterprises, the Home Loan banks and many of their 8,000 member institutions are touting the benefits.

"It was really one of the best things that happened to us," said William G. Batz, the executive vice president and chief operating officer of the Federal Home Loan Bank of Pittsburgh, at a Mortgage Bankers Association conference in May. "If it happens to our sister institutions, I would say: Don't be afraid of it."

With grants or low-interest loans of up to $450,000 apiece, the program helps banks, thrifts, and credit unions finance low-income housing across the nation. It has contributed more than $1.9 billion to help build about 430,000 housing units since its inception, according to the Home Loan Bank System's Office of Finance.

"These funds are really essential to provide good quality housing for very low-income folks," said Paul Carruthers, a vice president and community development manager with the $50 billion-asset AmSouth Bancorp of Birmingham, Ala.

Working through the Home Loan Bank of Atlanta's program since the mid-1990s, AmSouth has obtained roughly $18 million for projects from Florida to Tennessee.

"There is a huge need for this type of housing across the nation," Mr. Carruthers said. "Whether you call it work-force housing, service-sector housing, it's for folks we interact with for all of our needs."

Unlike other federal programs, the financing is not restricted to one type of housing. The program's subsidies have underwritten the development of transitional dorm-style housing in cities, migrant-farmworker rental units, and single- and multifamily homes.

Additionally, each Home Loan bank devotes 10% to 15% of its affordable-housing funds to a "set-aside" program. Low- and moderate-income families can get up to $5,000 per household to help pay for financial counseling, down payments, closing costs, and rehabilitation.

"It's an advantage of the affordable-housing program to address a wide variety of housing," said Chris Imming, the director of housing and community development and a first vice president at the Home Loan Bank of Topeka. "We aren't restricted like HUD grants."

Some observers say the program is too broad.

"We would like to see the money more deeply targeted to serve a low-income group," said Sheila Crowley, the president of the National Low Income Housing Coalition, noting that affordable rental housing is scarce. "We think more federal resources should be devoted to those most seriously in need."

Some conservatives worry that broadening the program to include Fannie and Freddie would encourage abuse.

The GSE bill adopted last week by the House Financial Services Committee would require Fannie and Freddie to put 5% of after-tax profits into an affordable-housing fund.

Rep. Ed Royce, R-Calif., called the proposed fund an "experiment in socialism," and Rep. …