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. 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. 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. 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. 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).