Published in the Wall Street Journal. By Nick Timiraos.

Nonprofit Groups Say Mortgage-Finance Firms Should Contribute Trust Funds

Two nonprofit housing organizations filed suit Tuesday against the regulator of Fannie Mae FNMA -3.47% and Freddie Mac FMCC -1.88% for not allowing the mortgage-finance companies to contribute funds to two federal affordable-housing trust funds.

Congress established two funds in July 2008 to finance low-income housing with a fraction of the annual revenue of Fannie and Freddie, but the companies’ regulator, the Federal Housing Finance Agency, suspended those payments in November 2008, two months after the companies were rescued from collapse by the U.S. government.

The Treasury has spent more than $150 billion to prop up the firms throughout the financial crisis. Now that Fannie and Freddie have begun reporting large profits, the housing groups argue that Fannie and Freddie should resume making payments to the funds and that the FHFA, which is acting as the firms’ conservator, can’t indefinitely suspend those payments.

“The conservator can’t simply ignore the law,” said Sheila Crowley, president of the National Low Income Housing Coalition, which is one of the plaintiffs. She said the circumstances that led the FHFA to suspend those payments no longer apply because the payments wouldn’t jeopardize the solvency of the companies.

An FHFA spokeswoman didn’t immediately comment on the lawsuit.

In the past, the FHFA has said that Fannie and Freddie should be barred from normal business activities, including payments to the trust funds, so long as they require taxpayer support. In a letter to the chief executives of both companies in November 2008, the FHFA said it was suspending the trust-fund payments because they would “further contribute to the financial instability” of Fannie and Freddie.

The suit is the latest in a flurry of efforts by different groups to claim a share of the growing profits of Fannie and Freddie, which have begun to send large payments to federal coffers over the past year. Last month, Fannie and Freddie paid $66 billion to the Treasury in the form of dividend payments.

The suit, filed early Tuesday in federal court in Miami, follows a separate lawsuit filed late Sunday in federal court in Washington by a hedge fund that invested in preferred shares in Fannie and Freddie. The hedge fund, Perry Capital LLC, is seeking to strike down an amendment to Fannie’s and Freddie’s bailout agreement that requires the companies to send all of their profits to the U.S. Treasury.

The lawsuits illustrate how the U.S. government faces greater scrutiny of its administration of Fannie and Freddie now that the firms are producing record profits and sending all of them to the government. The challenges are only “going to multiply until Congress reforms the companies,” said Julia Gordon, director of housing finance and policy at the Center for American Progress, a liberal think tank.

Congress created two different housing trust funds in 2008 to build a dedicated revenue source for low-income housing that wasn’t subject to the annual appropriations process. The trust funds allow states and state-designated grantees to apply for money that will finance new rental housing or rehabilitate existing units for families with very low incomes, often those earning 30% or less of the median income in their communities.

Fannie and Freddie were required to set aside 0.04% of every dollar in new mortgage purchases for the trust funds, which would have amounted to less than $500 million last year, according to the lawsuit.

“Winning this lawsuit would yield the largest new investment in low-income affordable housing in over 30 years,” said Rachel LaForest, executive director of Right to the City Alliance, a political advocacy group that is a co-plaintiff.

A report released last month showed that the number of extremely low-income renters jumped by 2.5 million to 12.1 million households between 2007 and 2011, according to Harvard University’s Joint Center for Housing Studies. The number of affordable rental units, meanwhile, edged down over the same period, to 6.8 million from 6.9 million.

In the lawsuit filed late Sunday, Perry Capital said that the Treasury’s decision to require Fannie and Freddie to send all of their profits to the government as dividend payments represented a “blatant overreach” that “illegally begins to liquidate” Fannie and Freddie. Perry Capital is being represented by Theodore Olson of Gibson, Dunn & Crutcher LLP, a former U.S. solicitor general.

A Treasury spokesman said the government was reviewing the lawsuit.

Perry Capital is one of a handful of hedge funds and other investors that began buying up the preferred shares at large discounts beginning over the past four years on the bet that Fannie’s and Freddie’s return to profitability could lead to a big payout. Last summer’s revamp of the bailout agreement prevents Fannie and Freddie from rebuilding capital or redeeming a new class of “senior preferred” shares owed by the Treasury.