State Mortgage Agences May Get $35 Billion Assistance

The U.S. Treasury will provide up to $35 billion over the next three years to state housing agencies to support low- and moderate income mortgages, according to new reports.

The program will provide assistance to government-funded state housing finance agencies in California and elsewhere, which have been suffered from many of the same problems as the rest of the mortgage industry over the past year and a half, with rising foreclosures and difficulty in selling their mortgages to investors putting a severe crimp in their finances.

Treasury officials were cited by Bloomberg News and the Wall Street Journal as saying the Obama Administration could announce the program within the next few days.

The administration reportedly plans to offer up to $15 billion in direct funding and purchase up to $20 billion in state housing agency mortgage debt, thereby freeing up additional capital to enable them to make new loans. Lending by housing finance agencies in many states has almost come to a halt due to a lack of funding in the economic downturn. Some state programs have ceased operations entirely.

The funding is expected to enable most state agencies to resume lending operations. The funds will be provided by the Treasury Department and government-owned lenders Fannie Mae and Freddie Mac.

Approximately 2.6 million homeowners have mortgages obtained through various state housing finance agencies, equal to about 5 percent of all mortgages. The state agencies have traditionally helped low- and moderate-income renters become first-time homebuyers, providing lower interest rates than what is available from private lenders, helping make a home purchase more affordable.

President Obama had promised back in February that the administration would assist state housing finance agencies, but most of its housing-related efforts since then have been focused on foreclosure avoidance and bringing down overall mortgage rates to spur home sales.

The initiative may face opposition from lawmakers who want the government to rein in spending, particularly as signs continue to point to a slowly recovering economy. However, the administration appears to believe the housing market will continue to require government assistance for the near future.

Critics have pointed to state housing finance agencies as an example of what went wrong with the mortgage market prior to the downturn, by encouraging people to buy homes they could not really afford. However, others point out that the state agencies' financial problems are not due to bad loans, but instead to the fact that investors are no longer willing to buy their mortgage bonds, which provide fresh capital for them to make additional loans, the same as private lenders do.