Community Development Block Grants: Neighborhood Stabilization Program; Assistance to Communities Affected by Foreclosures
Released: 2011-03-11T00:00:00

Introduction

The increasing number of mortgage foreclosures poses a financial threat to local housing markets, financial institutions, homeowners, and state and local governments. The impact of the foreclosure crisis on financial institutions and homeowners has been well documented, and has been the focus of congressional debate in the formulation of policy options. The impact on state and local governments, as well as neighborhoods, also has garnered the attention of federal policy makers.

In 2007, as the mortgage foreclosure crisis began to unfold, the U.S. Conference of Mayors projected that in 2008, mortgage foreclosures

would displace up to 1.4 million households from their homes; would result in $1.2 trillion in lost property values; and would potentially result in the loss of more than $1.4 trillion in projected real estate tax revenues—important sources of financing local government operations.

Given the prospect of declining revenues, falling property values, and blighted neighborhoods with significant numbers of vacant houses, some local officials have sought relief through judicial actions. In addition, various state and local officials called for federal intervention.

Congressional Action

Housing and Economic Recovery Act, Title III (P.L. 110-289)

In response to the mortgage foreclosure crisis several bills were introduced during the 110 th Congress that were intended to address specific issues, including:

reducing the number of homeowners facing foreclosure because of their inability to keep pace with rising interest rates as their adjustable rate mortgages, many of them subprime loans, reset; reclaiming the supply of vacant housing by providing assistance to states, local governments, and nonprofit entities that could use funds to acquire, resell, rehabilitate, rent, or demolish vacant properties in an effort to minimize potential blight and associated problems in neighborhoods with high concentrations of foreclosed properties; and addressing declining tax revenues, particularly property taxes and the subsequent cutbacks or curtailment in the delivery of public services.

Despite initial objections raised by the Bush Administration, including the threat of a presidential veto, H.R. 3221 , HERA, including Title III authorizing NSP, passed the House on July 23, 2008, and the Senate on July 26, 2008. Despite his objections to the provisions of Title III, President Bush signed H.R. 3221 into law as P.L. 110-289 on July 30, 2008.

Title III of HERA—Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes—appropriated $3.92 billion in supplemental CDBG assistance to states and local governments based on a formula developed by HUD that differs from that used to distribute funds under the regular CDBG program. HERA directed HUD to establish an allocation formula that distributed funds to states and local governments with the greatest need as measured by:

the number and percentage of foreclosed homes in each state or locality; the number and percentage of subprime mortgages in each state or locality; and the number and percentage of homes in default or delinquency in each state or locality.

The measure gave HUD 60 days after enactment to establish a formula for allocating funds to eligible states and local governments, and an additional 30 days to distribute funds to states and local governments. Nonprofit entities were allowed to participate in the program as sub-grantees, but could not receive a direct allocation of funds.

Formula and Allocation of Funds

Each state and local government that received funds under what became known as NSP-1 was required to allocate funds within 18 months of receipt and to give priority consideration to areas and metropolitan communities with:

the greatest percentage of home foreclosures; the highest percentage of subprime loans; and the greatest likelihood of facing a significant rise in the number of home foreclosures.

Although HERA identified specific factors to be used by HUD to develop a formula, it did not specify an actual formula other than requiring a minimum allocation for each state of 0.5% of the amount appropriated ($19.6 million). On October 6, 2008, HUD published in the Federal Register a notice on the allocation of NSP funds including information on the formula developed by HUD to distribute funds. HUD's weighted two-tiered formula used several sources to calculate state and local government allocations.

HUD first distributed the $3.92 billion in total appropriations to the 50 states, the District of Columbia, and U.S. territories, by assigning weights to the factors used in the formula. A total of nine factors were used to calculate each state's allocations, including (1) foreclosure starts in the last six quarters in the state and nation; (2) state and national foreclosure rates per household; (3) state and national subprime loans; (4) state and national subprime rate; (5) loans in default in the state and nation; (6) loan default rate in the state and nation; (7) loans 60 to 89 days delinquent in the state and nation; (8) rate of loans 60 to 89 days delinquent in the state or nation; and (9) state and national vacancy rate in census tracts with more than 40% of the loans that are subprime or high-cost loans. Each of these nine variables received the following weights outlined below. It is important to note that the number and the rate of each of the variables was used in the formula. The statewide allocations were calculated using the formula presented in Figure 1 .

Each state's allocation was further distributed to local governments using the second tier of the two-step allocation process. The second formula allocated funds based on a community's relative share of foreclosures and abandoned homes in the state. Each jurisdiction's allocation was calculated as shown in Figure 2 .

Communities that received a minimum allocation of $2 million based on the formula outlined in Figure 2 were allowed to directly administer their share of the state's NSP allocation, whereas all other CDBG entitlement communities not meeting this threshold were directed to request funds from the state. Based on a minimum threshold of $2 million, approximately 250 communities received direct allocations of NSP-1 funds. This is approximately 900 fewer communities than received grants under the regular CDBG program.

Eligible Activities

Unlike the larger CDBG program, which allows state and local government grant recipients to undertake any of 27 eligible activities authorized under the statute, HERA restricted grant recipient use of NSP funds to the following housing and foreclosure-related activities:

the creation of financing instruments that enable state and local government NSP recipients to finance the purchase and redevelopment of foreclosed homes and residential properties; the purchase and redevelopment of foreclosed residential properties for sale, rent, or redevelopment; the demolition of blighted residential structures; the establishment of land banks; and the redevelopment of vacant and demolished properties.

It should be noted that the ARRA made significant changes to the list of eligible activities. For example, ARRA limited the use of funds for land banks and demolition of blighted structures. Additional information on changes made by ARRA is provided in the NSP-2 section of this report.

Restrictions, Limitations, and Prohibitions

Purchase and Resell Price Restrictions. HERA limited the purchase and resell price of a home or residential property acquired by NSP grant recipients. HERA required that the purchase price amount that a grant recipient may pay to acquire a residential property must be less than the home's current appraised market value. The discounted value should be significant enough to ensure that when the home is sold by the state or local government the purchaser (homebuyer) will pay below market value for the home or residential property. Further, when a foreclosed home or property is to be purchased as a primary residence by an eligible homebuyer, the act limits the price for which a state and local government may resell such property. The resale price of the home can be no more than the cost the state or local government paid to acquire, redevelop, or rehabilitate the property.

Recapture of Funds . As originally enacted, HERA required a community or state to reinvest all profits earned during the first five years following its enactment in additional sales, rentals, redevelopment, and rehabilitation of foreclosed homes and properties. After the five-year period, all profits could be recaptured by the federal government and deposited in the U.S. Treasury unless HUD approved a request to allow a community or state to continue to use funds to finance activities eligible for assistance under HERA. The five-year recapture provision was eliminated with the passage of ARRA.

Other NSP provisions of HERA have the same requirements as funds appropriated under the regular CDBG program. For the sole purpose of expediting the use of funds under HERA, however, HUD issued alternative requirements to those governing the regular CDBG appropriations, except for requirements related to fair housing, nondiscrimination, labor standards, and environmental review. In addition, HERA:

prohibits funds from being used in economic development projects involving the use of eminent domain; limits the income of individuals and families who may benefit from assistance provided by the act to those whose incomes do not exceed 120% of the area's median income; requires a state and local government to certify that at least 25% of the amount allocated by the act would be used to purchase and redevelop housing for individuals and families whose incomes do not exceed 50% of the area's median income (AMI); and requires that each state receives a minimum allocation of 0.5% of the amount appropriated.

Table 1 presents data from HUD showing the distribution of NSP-1 funds by state.

According to HUD, by September 30, 2010, NSP-1 grantees had obligated 101.6% of their program funds within the 18-month time frame specified by the authorizing statute. HUD also reported that NSP-1 grantees expended 49.1% of their grant funds by November 2010. Further, HUD reported that NSP-1 grantees had committed and expended 14% of their grant funds to meet the requirement that at least 25% of program funds be used to benefit households whose incomes do not exceed 50% of the area's median income (AMI).

NSP 2: American Recovery and Reinvestment Act, Title XII (P.L. 111-5)

Legislative Action

During the first month of the 111 th Congress, Members debated the passage of the American Recovery and Reinvestment Act of 2009 (ARRA, H.R. 1 ). ARRA, which was signed by President Obama on February 17, 2009, as P.L. 111-5 , sought to mitigate the effects of the economic recession. On February 13, 2009, both the House and the Senate passed the conference version of the act, which includes $2 billion for NSP activities. The act gave HUD until September 30, 2010, to allocate funds to eligible recipients. Recipients are required to spend at least half of the funds within two years of allocation, and 100% within three years of the date funds are allocated.

Eligible Entities and Distribution of Funds

Under ARRA, $1.93 billion funds from the NSP-2 were distributed competitively to states, local governments, nonprofit entities, and consortia of for-profit and non-profit entities, partially based on the highest number and percentage of foreclosures. This was a departure from NSP-1, which distributed funds by formula to states and eligible local government. In addition to need-based factors that measure the concentration of foreclosures, ARRA directed HUD to select eligible entities based on additional factors that measured project quality such as:

a grantee's demonstrated ability to carry out proposed activities and expend funds within two to three years; a project's potential leveraging of other funds, both private and public; the concentration of investment needed to achieve neighborhood stabilization; and other factors determined by HUD.

ARRA required HUD to publish grant selection criteria within 75 days of passage of the law, and applications are due to HUD no later than 150 days after passage of the law. HUD was also given discretion to establish a minimum grant size. The program's Notice of Funding Availability (NOFA), posted on the HUD website on May 4, 2009, required that the amount requested was to be of "sufficient size to contribute toward significant and measurable neighborhood stabilization." The minimum grant request could be not less than $5 million, and was required to return at least 100 abandoned or foreclosed homes back to the housing stock. The act also required grantees to obligate NSP-2 funds within one year of its enactment. On January 14, 2010, HUD announced the awarding of $1.93 billion to 56 NSP-2 grant recipients. Table 2 list NSP-2 grant recipients by state.

Eligible Activities

ARRA made several modifications governing the use of NSP funds, including funds previously appropriated under HERA. It revised section 2301(c)(3)(C) of HERA related to the establishment of land banks for homes that have been foreclosed upon. Under ARRA, the establishment and operation of land banks was included as an eligible activity. Activities related to demolition under HERA were also amended by ARRA. Under ARRA, a grantee may not use more than 10% of its grant for demolition activities, unless HUD provides a waiver indicating that local market conditions make such demolition acceptable. Previously, under HERA, demolished vacant properties could be redeveloped for purposes other than housing. ARRA requires that redeveloped properties be only related to housing.

In addition, ARRA allowed HUD to use up to 10% of NSP funds for capacity building and technical assistance. HUD set aside $50 million for technical assistance grants (NSP-TA) to be used to assist NSP grantees in adopting sound underwriting and fiscal controls; to enhance the technical, management and financial capacity of NSP recipients; to develop and implement performance measures; and to incorporate energy efficiency strategies into state and local NSP program plans. On August 26, 2009, HUD announced the awarding of NSP-TA grants to 9 national ($44.5 million) and 10 local organizations ($5.5 million).

ARRA also allowed HUD to use up to 1% of NSP funds for staffing, training, technical assistance, monitoring, travel, research, and evaluation. Funds set aside for this purpose are available until September 30, 2012. HUD was granted authority to waive NSP requirements, with the exception of fair housing, non-discrimination, labor standards and environmental requirements.

Protections and Prohibitions

ARRA established several protections for renters, including tenants receiving federal and state assisted housing benefits. ARRA stipulated that grantees may not refuse to lease a housing unit acquired with NSP funds to a tenant who is already receiving Section 8 housing assistance. In addition, entities that acquire foreclosed properties with NSP funds are required to give tenants notice to vacate a property at least 90 days before the effective date of such notice. ARRA established several requirements for a bona fide lease under this clause. A lease is considered bona fide if the mortgagor is not the tenant; if rent is not substantially below fair market rent; and if the renter and the tenant are not related, and have no overt common interests that would make the tenant contract void.

Since individuals eligible for federal housing vouchers or certificates of eligibility can benefit from NSP funding, grantees that take over a property previously rented to an assisted housing beneficiary are subject to the lease and housing assistance payments for the occupied units. Grantees cannot terminate the lease based solely on the status of the tenant as a holder of a Section 8 certificate or voucher. Vacating the property prior to the sale is not a cause to terminate the lease contract, unless the owner decides to use the property for private or family use. If a public housing agency is unable to make payments to a successor tenant who is not eligible for federal housing assistance, the funds can be used to pay for utilities, moving costs, and security deposit payments. In addition, no funding under ARRA can be used to demolish public housing.

NSP 3: Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203)

Legislative Action

Congress appropriated an additional $1 billion for NSP-3 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203 , which was signed into law on July 21, 2010. Unlike the competitive format used to award NSP-2 funds, NSP-3 funds established a $5 million allocation for states and $1 million minimum allocation for non-state grantees.

Eligible Entities and Distribution of Funds

On October 19, 2010, HUD published a Notice in the Federal Register detailing program requirements and allocation method used to allocate NSP-3 funds. The Wall Street Reform Act established a minimum allocation of 0.5% ($5 million) for each of the 50 states and $1 million for local units of government. The act also required that funds be allocated to states and communities with the greatest need as measured by the percentage of homes in foreclosure that were financed with subprime loans, and loans in delinquency or default. HUD, in publishing its notice, established a targeting threshold for communities that would receive a direct allocation. Specifically, HUD stated:

The basic formula allocates funds based on the number of foreclosures and vacancies in the 20 percent of US neighborhoods (Census Tracts) with the highest rates of homes financed by a subprime mortgage, are delinquent, or are in foreclosure. This basic allocation is adjusted to ensure that every state receives a minimum of $5 million.

According to HUD's calculations, approximately 283 grantees may receive a direct allocation of funds. The list of possible grantees was announced on September 19, 2010, and published in the October 19, 2010, Federal Register Notice. Potential recipients had until March 1, 2011, to submit program plans to HUD. According to March 2, 2011, testimony by HUD's Assistant Secretary for Community Planning and Development, Mercedes M. Márquez, during a House subcommittee hearing on the program, HUD will obligate NSP-3 funds by March 31, 2011. The Wall Street Reform Act gives grantees two years from the date a grant agreement is signed with HUD to expend 50% of their NSP-3 allocation and three years to expend 100% of these funds.

Current Debate

On March 1, 2011, Representative Gary Miller introduced the Neighborhood Stabilization Termination Act, H.R. 861 , which would rescind the $1 billion in NSP-3 funds appropriated under the Wall Street Reform Act. On March 2, 2011, the House Financial Services Committee's Subcommittee on Insurance, Housing, and Community Opportunity conducted a hearing on NSP and three federal foreclosure mitigation programs. On March 9, 2011, the House Financial Services Committee considered, marked up, and ordered reported H.R. 861 . During the markup the committee approved by voice vote an amendment requiring HUD to publish a notice of termination of the NSP program on its website. The notice is to be posted within five days following the bill's enactment and is to include language directing citizens to contact their congressional representatives and locally elected officials if they are concerned about the impact of foreclosures on their communities.

During the March 2, 2011, subcommittee hearing and the March 9, 2011, markup session by the House Financial Services program, Representative Miller, sponsor of H.R. 861 , characterized the program as ineffective and a waste of taxpayers' dollars. He argued that given the need to address the larger issue of reducing the federal debt and deficit that funding for NSP-3 should be rescinded. In addition, he argued that the program was a give-away to banks and speculators. Other Members countered that the program has been successful in assisting communities to combat the negative impacts of the mortgage foreclosure crisis on neighborhoods, property values, and local revenues generated by property taxes. During the March 2 hearing, HUD's Assistant Secretary for Community Planning and Development, Mercedes M. Márquez, offered written testimony stating that HUD expects "NSP will impact 100,000 properties in the nation's hardest-hit markets," with 36,000 units already under construction. In addition, the Assistant Secretary's testimony stated that "based on NSP1 activity budgets, the Department estimates that NSP will support more than 93,000 jobs nationwide." Members also argued that the program helps reduce the supply of abandoned, blighted, and foreclosed housing stock.

A companion bill to H.R. 861 has not been introduced in the Senate.