One of the subprograms of greatest controversy within the major housing legislation passed by Congress on Saturday (HR 3221) is Section 2301, Emergency Assistance For The Redevelopment of Abandoned and Foreclosed Homes.
Initially, Present Bush threatened to veto the housing bill over this section. White House spokeswoman Dana Perino said, “The Senate bill would provide for $4 billion in block grants to states to purchase already foreclosed homes, which just helps lenders who now own these properties, not people trying to stay in their homes.” The White House has since backed down on the veto threat because of the need to secure the Fannie Mae and Freddie Mac bailout provisions in the overall bill and the President is now expected to sign the housing bill.
States and cities implementing the bill need to use good judgment in purchasing foreclosed properties under this program to avoid the problems the White House cited.
This program can do a lot of good — if properly implemented. A number of good policy choices must be made by local and state governments to make the program successful. This may not happen without careful planning and some outside technical assistance.
The program is a $4 billion one time allocation of Community Development Block Grant (CDBG) funds to major cities and state governments to be used to get foreclosed and abandoned properties occupied by households with annual incomes of 120 percent of the local area median family income or less. One quarter of the funds must be used to assist families earning less than 50 percent of the median income.
I will summarize the statute creating the program and flag some of the issues that need to be thought through before successful implementation of the program can take place at the local and state levels. (Read the bill).
Q: Who gets funding to carry out the program?
A: States and local governments, which received funding under the CDBG program receive funding. There are 30 some odd CDBG recipients among major Texas cities and counties along with the Texas Department of Housing and Community Affairs that receives the funds for smaller towns and rural regions of the state.
Q: How much funding is coming?
A: Nationally $4 billion will come as a one time allocation in 2008. The HUD Secretary is directed to come up with a formula to allocate funds based on the foreclosure and abandoned property problem. The statue says the Secretary will consider the following factors in developing a formula to allocate the funds:
- the number and percentage of home foreclosures in each state or unit of general local government;
- the number and percentage of homes financed by a subprime mortgage related loan in each state or unit of general local government; and
- the number and percentage of homes in default or delinquency in each State or unit of general local government.
Q: What does this mean for Texas?
A: Texas has the sixth largest number of foreclosures in the nation. According the Save America’s Neighborhoods coalition, the advocacy group behind the legislation, at the end of 2007, Texas had approximately 50,378 properties in foreclosure. Texas also has one of the highest rates of subprime lending, indicating that Texas is likely to receive a significant allocation of funds.
According to the Save America’s Neighborhoods coalition, under the Senate passed formula, Texas stands to benefit from $177.0 million in direct funds.
Q: How soon will funds be available?
A: The HUD Secretary is directed to come up with a formula for allocation in sixty days and the funds are to be distributed 30 days after that.
Issue: This is unprecedented in terms of how fast funds will be available. There has been little track record for local governments or even TDHCA (the state) to be able to quickly develop a housing program and get it implemented. Planning efforts need to be coordinated at the state level immediately to identify programmatic approaches that local governments can use. Otherwise one of two results are likely: 1) the funds are not used; or 2) the cities adopt less than optimal approaches that could result in inefficiencies or program failures.
Q: How long do the states and cities have to spend the funds once they receive them?
A: 18 months.
Issue: My concern here is related to the previous one – this has all got to happen far quicker that local programs have ever demonstrated the capacity to achieve. In the wake of Hurricane Rita, TDHCA was charged with developing a program to spend CDBG funds to deliver assistance hurricane survivors who lost their homes. Two years later that program is still trying to really get going. This is not from a lack of trying but due to the inherent coordination problems between local government and HUD and the lack of a really deep and experienced housing planning infrastructure in the state housing agency. If this is the experience at the state housing agency with about 300 employees, imagine how much more difficult this will be in smaller local jurisdictions with very small housing departments.
All of this speaks for the need for the state to provide guidance in planning and technical assistance to support the successful implementation of this program at the local level.
Q: What can the funds be used for?
A: Eligible uses are:
- establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties, including such mechanisms as soft-seconds, loan loss reserves, and shared equity loans for low and moderate income homebuyers;
- purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed upon, in order to sell, rent, or redevelop such homes and properties;
- establish land banks for homes that have been foreclosed upon;
- demolish blighted structures; and
- redevelop demolished or vacant properties.
Issue: I am deeply skeptical about what cities will come up with in terms of financing mechanisms for the purchase of foreclosed homes by low and moderate income homebuyers. Traditionally, cities have offered soft seconds in the form of downpayment assistance grants placing the government in a second lien position. Sometimes no lien is secured at all. In the case of loan default the government’s investment is wiped out.
If more well thought out and better securitized financial assistance is not developed, this program is unlikely to have long term positive results. At best this approach would cause government to disproportionately allocate these funds to the most creditworthy home buyers, generally leaving behind many of the most needy lower income families.
This is a strong argument for local government to consider the purchase of foreclosed rental properties instead of relying solely on single family owner occupied houses under the program.
As part of a program of assistance to local governments and in support of its effort to craft its own successful program to serve the smaller cities and rural areas of the state I recommend that TDHCA develop a set of best practices in the area of financing mechanisms for this program.
The option of establishing land banks is an interesting one. CDCs and the state should collaborate to propose workable models that cities could adopt.
If cities choose to emphasize the demolition of blighted structures with these funds then the purpose of the legislation would be unrealized. A demolition program would clearly be appropriate only in cities where a large number of derelict foreclosed homes have been sitting empty and vandalized. I can think on no such neighborhoods in Texas.
Yet local government may see the demolition option as an irresistible opportunity to divert these federal funds into city coffers to carry out routine code demolition work on houses that are not abandoned because of the foreclosure crisis. This would be an unconscionable diversion of funds from assisting families and neighborhoods impacted by foreclosures. Yet, without string local public interest monitoring and advocacy, this will probably occur.
HUD should make it clear that structures to be demolished or rehabilitated must be related to the foreclosure crisis to prevent this type of abuse of the program.
Rental foreclosures are eligible for purchase. This would be a great way to address the low income (<50 percent MFI) set aside population. Yet, a number of concerns occur. There needs to be some aggressive fair housing advocacy around this program to push cities to consider the acquisition of properties in desirable and nonsegregated neighborhoods. It would be a disaster if this program reinforces existing segregation. The principles of economic integration of the tenant population need to be applied within any multifamily property acquired under this program. Assistance in renting an apartment acquired under this program needs to be targeted at tenants displaced by foreclosure.
Q: What are the eligibility requirements for households to receive assistance?
A: Housing units assisted under the program must be occupied by households with annual incomes of 120 percent of the local area median family income or less. One quarter of the funds must be used to assist families earning less than 50 percent of the median income.
Issue: The National Low Income Housing Coalition pushed hard to make sure lower income families could benefit from the program. The result is good – 25 percent of the housing must go to families at or below 50 percent of MFI.
Achieving this requirement will require extra effort on the part of the implementing government agencies. Few have much success with targeting this population for homeownership outside of partnerships with Habitat for Humanity. Securing a source of first lien mortgage loans for families at this income level is much more challenging today that it was before the collapse of the subprime market. Lacking experience with this population local governments are likely to not be prepared to offer the pre and post purchase counseling and other services essential to ensure the long term success of these lower income buyers.
Effort needs to be devoted to encourage local governments to consider using a portion of the funds to acquire rental housing that has been foreclosed instead of concentrating completely on owner occupied property.
This is one more area in which best practice models and technical assistance are essential.
Q: What are the restrictions on resale of houses by the government?
A: Any purchase of a foreclosed upon home or residential property under the program must be at a discount from the current market appraised value of the home or property, taking into account its current condition, and such discount shall ensure that purchasers are paying below market value for the home or property.
If an abandoned or foreclosed upon home or residential property is purchased, redeveloped, or otherwise sold to an individual as a primary residence, then such sale shall be in an amount equal to or less than the cost to acquire and redevelop or rehabilitate such home or property up to a decent, safe, and habitable condition.
Issue: This is the stated concern of the White House about the program. It is vital that state and local government use care and wisdom in ensuring that they negotiate a good deal in purchasing property and not simply do what is easiest and enrich the lender. Multiple independent appraisals should be required for all government purchases.
Q; What are the long term affordability requirements?
A: That will be determined by the HUD Secretary. The statute directs the Secretary to come up with regulations to require the houses to be affordable for the longest feasible term and remain affordable to low and moderate income families.
Issue: To the extent downpayment or equity grants are provided to individuals the state and cities should insist on a share of the equity in the house and not provide a simple grant in the form of a “forgivable loan.” These type of grants enrich the handful of lucky recipients who get the grants while failing to maintain the public’s investment and failing to maintain the affordability of the house.
Q: What happens to the money the state and cities earn from sales, rentals, and redevelopment?
A: I find this section of the statute unclear. Here is what I think is says.
For five years after the passage of the law the state and cities must use any revenues from the program to undertaken more eligible activities under this program. After that I think the revenues have to be returned to the US Treasury.
Concluding issue: This new law offers a tremendous opportunity to mitigate the effects of the foreclosure crisis IF we accept the responsibility to create a new and effective program informed by the collective wisdom and experience of the Texas housing community. If this program is not carefully thought through and responsibly implemented if will offer further ammunition to those who claim that government housing programs do not work.