A New $600 Million Slush Fund For "Housing"

The Wall Street Journal reports:

As the Senate prepares to vote on its mortgage bailout this week, one part of Banking Chairman Chris Dodd's bill deserves more scrutiny. It's a section called "affordable housing allocations," and while it sounds innocuous, in practice it amounts to a new tax to create a permanent subsidy for state governments and political activists.


Like the bailout that has already passed the House, the Senate bill features a special new tax on Fannie Mae and Freddie Mac. We have long urged reform of the two mortgage giants, which operate with an implicit government guarantee and therefore a license to endanger the taxpayer if they take on too much risk. The shares of both plunged yesterday to new lows based on their credit risks. But as a price for allowing more oversight of the two companies, Mr. Dodd and House Financial Services Chairman Barney Frank want to cut their allies in on even more of the action.

Mr. Dodd creates an annual tax of 4.2 basis points on the mortgages that Fan and Fred purchase each year. Initially this money will go to finance losses resulting from the bill's bailout of refinanced mortgages. But by 2012 most of the cash from this tax will be directed to the new "affordable housing" funds. Mr. Frank applies a 1.2 basis-point tax on the value of all the loans Fan and Fred hold or have guaranteed, to collect roughly the same amount of money. The annual windfall here could amount to more than $600 million at the start, growing to perhaps $1 billion or more, depending on how fast the companies grow.


Even better for the pols, this money won't end up in the Treasury's general fund. Instead, they've written the bill to steer the cash toward some of their favorite political allies. In the Senate bill, the Secretary of Housing and Urban Development gets the largest pot to distribute, a full 65% of the "affordable housing" funds. Within guidelines established by the bill, the HUD chief has discretion to favor particular states while punishing others in creating a formula for doling out block grants.

You'll want to read the whole article.