Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac.

An interesting day today. I met someone who used to work for Fannie Mae and another who used to work for Freddie Mac.

Freddy's real name is: The Federal Home Loan Mortgage Corporation and Fanny's is the Federal National Mortgage Association.

Both are in receivership after the crash as both of them had bad mortgage debt. However, both organisations were involved in the affordable housing rental market and funded affordable housing and bought Low Income Housing Credits - about 40% of all the LIHTC available between them.

When they started making losses they did not need Tax Credits as in order to benefit from them they needed taxable income which they did not have. Their withdrawal from the LIHTC market had a detrimental effect.

The Community Re-investment Act (CRA)was introduced in the 1980's to counter the impact of so called 'red lining' where financial institutions avoided operating in areas of economic deprivation. They were happy to take people's deposits but were not happy to support businesses in the same area. This behaviour, whether it was intentional or not, had the effect of being racist. The CRA set up a system of rating how well banks performed in terms of community banking. This was important as banks required a high CRA rating in order to be allowed to take over other banks. During the 1980s there was a drive by banks to merge and acquire other banks; but they need approval of the Office of the Commissioner of Currency to acquire or merge. If the bank's CRA rating was insufficient they were prevented from acquiring or merging. Banks therefore took a keen interest in the CRA. Investment in affordable housing via LIHTC counted towards and increased CRA rating. Therefore banks were keen to acquire LIHTC to support their wider business.    Different banks have different operating areas. In some areas there is a concentration of banks and where this is the case LIHTCs will be bought at a very high level (anecdotally, up to $1.17 per $1 of tax credit). Where there was not competition LIHTC will sell for a low level say 85c per $1 tax credit. Typically, the coastal areas have higher LIHTC prices than areas further inland.

This is where Fannie Mae and Freddie Mac come in. They were not subject to the CRA so bought LIHTC more evenly across the country. As they bought such a high percentage of LIHTC (40%) this dampened the impact o LIHTC prices caused by the CRA. When Fannie and Freddy  left the market the prices of LIHTC's became more variable.

I also met some folks from the Tax Credit Coalition which is an advocacy group who are supported by and work for the law firm Nixon Peabody. The Tax Credit Coalition lobbies Government and advocates on behalf of its 140 members drawn from different parts of the LIHTC industry. There is non profit and for profit support for affordable housing. Their is a danger that LIHTC will cease to exist. There is work going on in Congress at present to review the tax laws. Tax Credits could be abolished or tax liabilities generally could be reduced, making tax credits less valuable or reducing demand.