As of Wednesday, September 10, 2008

Social Mission in Doubt As the Firms Enter

Conservatorship
By RUTH SIMON and MICHAEL CORKERY
September 10, 2008; Page A5

An unanswered question in the takeover of Fannie Mae and Freddie Mac is what happens to the social goals
mandated for the agencies by Congress -- which include boosting homeownership and funding apartment
construction for low- and moderate-income families.
 Fannie and Freddie's activities have had a broad impact on the housing
market that goes well beyond the packaging and guaranteeing of residential
mortgages. The companies have provided billions of dollars for the
development of low-income rental housing, created programs to get more WHAT'S POPULAR
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Regulators say efforts to meet the social goals will continue as Fannie and
Freddie operate under government conservatorship. "We will be working
with the companies to establish a plan to ensure that they fulfill their
affordable-housing mission," says James B. Lockhart, director of the
Federal Housing Finance Agency, or FHFA, which oversees Fannie and
Freddie and is responsible for setting the companies' goals next year.

But the details of how these goals will be met and how Fannie and Freddie will balance their social goals with the need to shore up their finances
remain to be worked out. A spokeswoman says the companies' new chief executives are reviewing existing programs.

The future of Fannie and Freddie's social mission is at the heart of a debate brewing in Congress over the fate of the two companies. Democrats
invoke the goals in defending the companies against critics.

But some Republicans say the two companies should be privatized and their social mandates ended. "There is no validity in taking a for-profit
private company and forcing a nonprofit social mission on it," says Texas Rep. Jeb Hensarling. "We already have the [Department of Housing and
Urban Development] that has 90 programs with either a housing or urban-development mission."

Even those who argue Fannie and Freddie should remain under some form of government control say the companies need to do more to fulfill their
affordable-housing goals. Critics say the companies have too often put shareholder profit and executive compensation over broader societal needs.

One reform being floated would create a rule similar to the one that governs the Federal Home Loan Banks, which requires that a tenth of the banks'
annual profits be spent on affordable housing. Such a rule would give Fannie and Freddie executives little discretion over whether to invest in
housing projects that may not yield huge profits -- something critics say they were often loath to do.

Congress took steps toward such rules with the creation this summer of the Affordable Housing Trust Fund, which requires Fannie and Freddie to
set aside money that would provide about $325 million to $585 million a year to help borrowers facing foreclosure and to build and rehabilitate low-
income housing.

"One thing we could do is to make sure the companies have more skin in the game," says Conrad Egan, a former HUD official and current chief
executive of the National Housing Conference, a nonprofit group that advocates for affordable housing.

In the short term, the companies' social goals may take a back seat to the need to strengthen their finances, says John H. Vogel, Jr., an adjunct
professor at the Tuck School of Business at Dartmouth. For instance, the companies were the largest purchasers of tax credits used to fund low-
 income housing. But their purchases of such credits dried up even before the government takeover because mounting losses meant they didn't have
profits to offset.

In the rental market, Fannie and Freddie have helped boost the funding for affordable housing by buying multifamily mortgages. Together they also
snatched up about 40% of available low-income housing tax credits in recent years, according to syndicators. As they and other investors have
pulled back from the market, it has become more difficult and more costly for developers to fund low-income housing developments.

The companies have a mixed record when it comes to meeting social goals through residential mortgage business. Fannie and Freddie helped boost
homeownership by moving away from "one-size fits all" underwriting. For instance, they began allowing first-time home buyers to make down
payments of as little as 3% and borrowers to count court-ordered child support payments as income, notes Michael Shea, executive director of
Acorn Housing Inc., a nonprofit that focuses on homeownership.

But Mr. Shea and others say the companies have sometimes let their drive for profit get in the way of responsible lending. As they lost market share
to subprime lenders and others making risky loans, Fannie and Freddie responded by increasing their exposure to riskier mortgages, both through
their traditional guarantee business and the purchase of residential mortgage-backed securities backed by subprime mortgages and Alt-A loans, a
category that includes mortgages made to borrowers who don't fully document their income and assets. Some of the loans underlying the bonds
counted toward the companies' housing goals. Such investments have played a key role in the companies' financial troubles.

In April, HUD excused the companies from meeting certain goals related to the financing of home purchases by low- and moderate-income
borrowers. In letters to the companies, HUD said the goals were "not feasible" given market conditions. The letters also cited a need to preserve the
companies'"financial stability."

Write to Ruth Simon at ruth.simon@wsj.com and Michael Corkery at michael.corkery@wsj.com

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