The government-sponsored enterprises (GSEs) are Fannie Mae, Freddie Mac, and the Federal Home Loan Bank (FHLB) System. The GSEs are shareholder-owned, for-profit corporations chartered by Congress to provide specific services in exchange for certain government benefits not afforded the private sector. In exchange for those benefits, the GSEs must make a commitment to affordable housing and support affordable housing finance and community development.

The FHLB System was created in 1932 by the Federal Home Loan Bank Act to stimulate mortgage financing and provide liquidity to credit markets that had been adversely affected by the Great Depression. In 1989,  Congress expanded the FHLB System’s public policy mission to include affordable housing and community development lending. The 12 FHLBs are privately capitalized, cooperatively owned banks, and currently 8,104 financial institutions are member-owners.1 FHLBs issue advances (or loans) to member institutions at rates slightly above their borrowing rate and enjoy the same discount that other federal agency debt does in the capital markets. FHLBs are regulated by the Federal Housing Finance Board, an independent regulatory agency of the executive branch of the U.S. government with a five-member board comprising the Secretary of the U.S. Department of Housing and Urban Development (HUD) and four members appointed by the President.
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Federal policy at the time looked to the private sector to create affordable rental units because it had the necessary capacity and political clout. Under the big production programs, the government’s primary policy goals were to house low-income people and reduce their rent burdens. The leading motivation of the typical property owner, on the other hand, was to make a profit—both as an operator of an apartment building during the contract term and through the reuse of the building when the government contract ended. There was nothing wrong with the owners’ intentions, and they were clearly articulated in the contracts that they entered into, but the goals of the government and the for-profit owners were not necessarily in alignment. That is especially true considering the lack of restrictions on ending the affordable use of the properties once the contract terms ran their course.

This is an excerpt from The NEXT American Opportunity. The full text can be downloaded as an Adobe PDF Document.