Funding Available for Foreclosed Properties

State and local governments have an opportunity to provide some much needed relief to the economic impact of the mortgage crisis in neighborhoods but some obstacles and unintended consequences could mute this opportunity.

As part of the Housing and Economic Recovery Act of 2008, Congress appropriated a total of $3.9 billion to be distributed to state and local governments by the Department of Housing and Urban Development (HUD). Called the Neighborhood Stabilization Program (NSP), provides funds for HUD to allocate in an expedited fashion to state and local governments in need of purchasing foreclosed and abandoned properties to prevent further deterioration in neighborhoods as a result of the current economic climate.

The funds may be used principally for five activities:

• To establish financing mechanisms to purchase and redevelop foreclosed and residential properties;
• To purchase and rehabilitate foreclosed and abandoned properties;
• To establish land banks for foreclosed homes;
• To demolish blighted structures; or,
• To redevelop demolished or vacant properties.

The funds are being provided as an amendment to FY2008 community development block grant (CDBG) funds. The distribution uses variations to the CDBG formula but reflects congressional intent to address foreclosed and abandoned property. In the normal CDBG formula, local governments with a population of 50,000 or more receive a direct allocation from HUD from 70 percent of the total allocation to the program. The localities receiving these funds are called entitlement communities. Thirty percent of the funds are sent to the state which distributes their allocation to non-entitlement communities, those localities with less than 50,000 in population.

The NSP formula is based on need in addressing the aforementioned problems of foreclosure and abandoned properties. As a result, the formula for NSP did not include all entitlement communities. In creating the formula to distribute the funds, HUD determined that every state should receive a minimum $19.6 million. HUD also determined if a locality did not receive at least $2 million it would not be allocated a grant. As a result, more than half of the CDBG entitlement communities did not receive direct NSP funds. They must now join the other localities in applying to the state for funding.

For example, in Georgia, only nine of the 22 entitlement communities received direct NSP funds. The state received $77 million, $37 million more than its FY2008 CDBG allocation. These are the communities which received direct NSP funds:

DeKalb County $18.5 million
Atlanta $12.3 million
Gwinnett County $10.5 million
Fulton County $10.3 million
Clayton County $ 9.7 million
Cobb County $ 6.8 million
Columbus-Muscogee $ 3.1 million
Augusta $ 2.4 million
Savannah $ 2.0 million

The following Georgia entitlement communities did not meet the $2 million NSP threshold (FY2008 CDBG totals in parentheses): Albany ($1.1 million); Athens-Clarke ($1.4 million); Brunswick ($435K); Dalton ($403K); Gainesville ($394K); Hinesville ($296K); Macon ($1.3 million); Marietta ($681K); Rome ($501K); Roswell ($462K); Sandy Springs City ($540K); Valdosta ($586K); and, Warner Robbins ($453K).
Each of these communities must now apply to the state if it wants to receive NSP funds.

As a result of the expedited fashion there are a few issues worth noting:

1. There is a very short time for these funds to be distributed and obligated. State and local plans must be submitted by December 1st. The plans do not have to be complete but must have sufficient information to identify to HUD how these funds will be spent to address the local problem. The truncated time frame will place an enormous amount of pressure on both HUD and the grantees receiving these funds.
2. Funds must be obligated in 18 months. If not, the funds will be recaptured.
3. Non-entitlement communities will receive stiffer competition from entitlement communities when applying for state funds. Those entitlement communities which did not receive a direct allocation of NSP funds may apply to the state for funding.
4. When preparing its plan, a state may not have sufficient data to truly reflect local needs. While HUD has data available to help state and local communities identify their needs, it is incumbent upon non-entitlement communities to ensure it has good data and that the data is submitted to the state.
5. It is important for local communities to clearly identify how it will spend these funds. Local communities may apply to the state for pre-agreement awards to help plan its strategy. Part of the strategy is to clearly identify its local need. For example, some communities may have property owners more than 90 days arrears in payments. Other communities may not have this problem
6. States may decide to administer the program itself.
7. Twenty-five percent of the funds must be spent on those families with incomes at 50 percent or below median income. It is in the localities’ best interest to ensure its housing authority is involved in serving this population. HUD acknowledges this provision lends itself to rental housing more so than homeownership.
8. Properties must be sold at a maximum discounted rate of 15 percent below the most current appraised value. While this may allow for easier selling of the properties it could have the unintended consequence of deflating overall property values.
9. All fair housing laws still apply to this program. HUD is strongly discouraging localities from purchasing owner occupied homes because the Urban Relocation Act (URA) would apply. URA opens the door for lengthy and sometimes contentious actions which could delay implementation of the program initiatives.
10. HUD also encourages localities to seek counsel if it is interested in exercising eminent domain over property.
11. As local governments explore options to use these funds, they may also want to explore ways in which these funds can be leveraged to attract other resources for broader community development projects. One option may be to explore issuing bonds. For those unfamiliar with bonds, the National Organization of African Americans in Housing (NOAAH) has an excellent primer on bonds on its web site.


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