Washington Report | July 13, 2018

Almost exactly 10 years ago — on July 15, 2008 — Treasury Secretary Henry Paulson told the Senate Banking Committee: “If you’ve got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won’t have to take it out.”

The metaphorical artillery Paulson was talking about, at a time when the housing market downturn was rapidly becoming a crash, was the authority the Bush administration was seeking to inject capital into Fannie Mae and Freddie Mac to maintain the solvency of the companies and the stability of the mortgage market. Paulson coined the phrase to suggest that the administration did not expect to do such a thing but having the authority would calm nervous investors.

A few weeks later, Congress passed the Housing and Economic Recovery Act of 2008 (HERA), which provided the authority Paulson sought and created a new GSE regulator, the Federal Housing Finance Agency. By September of that year, FHFA had placed Fannie and Freddie into conservatorship — and Treasury had entered into preferred stock purchase agreements with the companies.

HERA also authorized a temporary increase in Housing Credit authority and a raft of program improvements advocated by NCSHA and others — an advocacy campaign recounted as an oral history in the current issue of the Novogradac Journal of Tax Credits.

Other important HERA provisions included a temporary increase and some program improvements for housing bonds and creation of the Housing Trust Fund, Capital Magnet Fund, and the Neighborhood Stabilization Program — all of which HFAs have played a major role in implementing.

HERA’s most important provision for state HFAs, though, was its authorization of the Treasury Department to use Paulson’s bazooka.

HERA allowed Treasury to buy securities of Fannie- and Freddie-backed housing bonds. This became the basis for the Obama administration’s “HFA Initiative,” announced in October 2009. By then, every state HFA had “severely curtailed” their lending programs and some had suspended them, as NCSHA wrote in a letter to Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan.

Using that HERA authority, NCSHA worked with the administration to create the New Issue Bond Program, through which Treasury purchased more than $15 billion in securities backed by state and local HFA housing bonds, and the Temporary Credit and Liquidity Program, which provided an additional $8 billion in liquidity for outstanding HFA housing bonds.

The initiative was a success: It enabled HFAs to finance more than 100,000 mortgages for first-time homebuyers and 24,000 units of affordable rental housing that otherwise would not have happened. And it ensured “the ability of the HFAs to maintain their important, Congressionally-supported role in the housing market, providing access to affordable mortgage credit for low- and moderate-income Americans… and stability to the financial markets and promoting mortgage affordability, while at the same time protecting the taxpayer,” according to a report from the Treasury Department.

A squirt gun would not have sufficed.