Could a federal takeover of Fannie Mae and Freddie Mac prove disasterous for low income rental housing?

Who would have thought we would be looking at a federal takeover of Fannie Mae and Freddie Mac?

Because it was never anticipated that this would happen there are a number of potential consequences of the takeover that have not been thought out.  Failure to do so may have disastrous consequences for low income rental housing.

Walter Moreau, executive director of the Austin-based nonprofit housing organization Foundation Communities, and Texas’ largest nonprofit tax credit developer, altered me to a some areas of deep concern to the affordable housing community regarding the impending federal takeover of Fannie Mae and Freddie Mac (“the GSEs”).

Today’s New York Times article discloses the likely federal government takeover of Freddie and Fannie. The Times reports when the auditors from Morgan Stanley started to review the GSEs’ books, they found some questionable stuff.

Freddie Mac and Fannie Mae have also inflated their financial positions by relying on deferred-tax assets – credits accumulated over the years that can be used to offset future profits. Fannie maintains that its worth is increased by $36 billion through such credits, and Freddie argues that it has a $28 billion benefit.

Even by Fannie and Freddie standards $64 billion is a lot of money.  We suspect much of these “deferred-tax assets” are low income housing tax credits.  The GSEs have become probably the largest buyers of low income housing tax credits in recent years.  An accounting decision to remove those credits from assets would probably push both companies’ capital below the regulatory requirements.

Walter Moreau points out that tax credits have no value to the GSEs unless they generate profits, which they have failed to do over the last four quarters and seem increasingly unlikely to the next year.

Even if the auditors don’t allow them to be counted as an asset, the low income housing credits do have value. The critical question is what the government will do with the asset when it takes over the GSEs.

They could sell the credits to corporations. They would take a loss right now, but they could liquidate the credits at a cheap enough price.  But if the federal government takes over the GSEs can the government sell the credits?  It’s not clear if there is statutory authority to do so.  If it is legal, the feds could raise money by selling the credits, but it would be like a government giveaway (eg. the government selling credits against future federal taxes at a 25% discount or more).

From the standpoint of affordable housing production, dumping tax credits on the market right now would saturate the market. Most of the profitable corporations in America that buy credits likely already have all the credits they could handle to offset their future tax liability in the current economy.

Dumping the tax credits held by Fannie and Freddie in the market would have a disastrous impact on the ongoing housing tax credits being issued under federal authority by the states.  It would dramatically devalue credits issued under the ongoing program, producing far fewer units of housing per federal tax credit.  So the cost to the federal government of dumping the GSE’s huge inventories of tax credits have to factored against this offsetting cost to the government housing program.

If the feds takeover the GSEs and just erase their credits, this could help drive the housing credit market up.  Tax credit prices would rise, producing more equity for the on-going low income housing tax credit program.  But since Fannie and Freddie were two of the largest buyers of housing tax credits wiping those out would be a huge loss to the corporations (and a huge cost to the taxpayer).

Another interesting question: What happens to all the low income housing tax credit developments where Fannie and Freddie are the limited partners? Would the federal government become the limited partner?  That would be interesting! 🙂

These are questions that demand immediate attention from housing advocates.