WASHINGTON — Federal Housing Finance Agency Director Mel Watt's decision Thursday to stand up the affordable housing trust funds sharply divided lawmakers along party lines, with Democrats welcoming the decision as overdue while Republicans denounced it as a mistake.

The agency notified Fannie Mae and Freddie Mac that they will be required to set aside a portion of their revenues starting Jan. 1 to fund the development and preservation of rental housing for low-income families. Congress authorized the creation of a National Housing Trust Fund and the Magnet Fund in 2008, but they were never funded because Fannie and Freddie were seized by the government due to their deteriorating financial condition.

House Financial Services Committee Chairman Jeb Hensarling immediately blasted the FHFA's decision, noting the government-sponsored enterprises are still backed by taxpayers.

"Diverting assets to housing trust funds instead of repaying taxpayers or stabilizing Fannie and Freddie's finances only makes matters worse," Hensarling said.

The Texas Republican vowed to hold a hearing on the issue in January, accusing Watt of making his announcement at the end of the Congressional session in an effort to evade scrutiny.

"That will not happen because the Financial Services Committee will call director Watt to testify as soon as the next session of Congress begins in early January," Hensarling said.

But the GSE regulator and former member of the House Financial Services Committee can expect to have the support of his former Democratic colleagues on the panel, as well as consumer and affordable housing advocates who have pushed FHFA to provide money for the trust funds.

"I am thrilled that Federal Housing Finance Agency Director Mel Watt has decided, in keeping with his statutory mandate, that it's time to fund the Housing Trust Fund and the Capital Magnet Fund," said Rep. Maxine Waters, the top Democrat on the panel. "By allocating a tiny percentage of Fannie Mae and Freddie Mac's profits to these funds, we have the chance to improve the lives of millions of American children, families, people with disabilities and the elderly."

The National Housing Trust Fund will fund the development and preservation of affordable rental housing while the Magnet Fund will provide grants to community development financial institutions to support their affordable housing initiatives.

During 2015, the GSEs will set aside 4.2 basis points for each dollar of loans they purchase from lenders, according to a letter Watt send to the CEOs of Fannie and Freddie. The money will be distributed to the funds in early 2016.

Watt's move was also praised by affordable housing advocates who have waited six years for the GSEs to provide money to the trust funds.

"The decision by Mr. Watt that will result in the first funds for the National Housing Trust Fund is a great victory for the thousands of housing and homeless advocates who have worked tirelessly to establish the National Housing Trust Fund," said Sheila Crowley, president and chief executive of the National Low Income Housing Council. This will provide "critical new resources to expand the supply of rental housing for people with extremely low incomes," she said in a statement.

Advocates estimate the GSEs will provide somewhere between $300 million to $700 million a year for the funds.

By comparison, a bipartisan Senate bill to wind down and replace Fannie and Freddie with a new secondary market agency would have provided even more funds.

The bill, co-authored by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would have generated between $3.7 billion and $5 billion a year for the trust funds. That bill was supported by some of Republican members of the Senate Banking Committee members, but opposed by progressive Democrats who said it did not do enough for affordable housing.

Corker criticized Watt's decision on Thursday, saying it was "beyond irresponsible to restart these affordable housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac."

"These two entities would not be generating one penny of revenue without taxpayer backing, and until the American taxpayers are taken off the hook for a future bailout, FHFA should continue to suspend payments to these funds," Corker said.

But Senate Democrats, like their House counterparts, were supportive of Watt's decision.

The announcement is "good news for millions of Americans seeking affordable and permanent housing," said Senate Banking Committee Chairman Tim Johnson. "I applaud Director Mel Watt for his leadership on this issue and continued dedication to improving housing opportunities for low-income families across our nation."

According to the National Low Income Housing Council, the National Housing Trust will provide block grants to the states, at least 90% of which must be used for the protection, preservation, rehabilitation, or operation of rental housing. No less than 75% of the funds for rental housing will benefit extremely low income households with the rest benefiting those with very low incomes. Up to 10% of Trust Fund resources may be used for homeownership activities for people with very low incomes.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.