By Eugene T. Lowe
June 2, 2008

The Senate Committee on Banking, Housing, and Urban Affairs May 20 passed “The Federal Housing Finance Regulatory Reform Act of 2008.” Chairman Senator Chris Dodd (CT) and Ranking Member Senator Richard Shelby (AL), in a bipartisan agreement, said that the legislation will “help prevent the rising number of foreclosures, create more affordable housing, and reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system.” The GSEs are Freddie Mac and Fannie Mae. The legislation passed by a vote of 19-2.

Included in the bill is a provision that establishes a permanent Housing Trust Fund. The provision, championed by Senator Jack Reed (RI), was included in a manager’s amendment offered by Dodd. Reed had originally put forth a proposal for an affordable housing fund that would have been funded by GSE funds only, but agreed to a change that creates a permanent Housing Trust Fund with monies from the GSEs and other funds designated by Congress. Seventy-five percent of the trust funds would go to extremely low-income families.

The bill creates within the Federal Housing Administration (FHA) a HOPE for Homeowners Program. Offered by Dodd, the HOPE for Homeowners Program would help homeowners with troubled mortgages to refinance with FHA insurance. Shelby was opposed to the program because homeowners default on the FHA mortgages could potentially be a cost to taxpayers. But Shelby agreed to a compromise that would allow GSE funds to be used to cover the defaults in the HOPE program. One hundred percent of the GSE funds would be used in the first year to cover HOPE program defaults. In the second year, the Housing Trust Fund would begin and 50 percent of the funds would be used for the HOPE program, and 50 percent for the Trust fund. In year three, 25 percent of the funds would be used for the HOPE program and 75 percent for the Trust fund. The HOPE program sunsets in year three and 100 percent of the funds would go to the permanent Housing Trust Fund.

The House has already passed GSE legislation (H.R. 1427) and included it as one of several amendments to its foreclosure prevention bill, H.R. 3221, which passed on May 8. The House has also passed housing trust legislation, H.R. 2895. The major difference between the House and Senate GSE bill is that the House would use 100 percent of the first year funds for housing relief in the Gulf Coast, while the Senate uses the money for the HOPE program to protect FHA if there are mortgage defaults.

The Senate bill is expected to go to the floor this week.