Economy Affecting Local Governments and Working Families

Local governments and working families are feeling the crunch of the economic crisis and could be in for some long term pain according to two recent reports. The National League of Cities (NLC) recently released it annual survey of city finance officers which concluded that municipalities’ fiscal condition has decreased dramatically in 2008.

Working in partnership with the 49 state municipal leagues, NLC serves as a resource to and an advocate for the more than 19,000 cities, villages, and towns it represents. More than 1,600 municipalities of all sizes pay dues to NLC and actively participate as leaders and voting members in the organization. The City Fiscal Condition Survey is a national mail survey of finance officers in U.S. cities conducted in the spring of each year. This is the 23rd edition of the survey.

The findings included the following:

Two in three city finance officers report their cities are less able to meet the fiscal needs in 2008 than in the previous year;

Final tallies for 2007 reveal city revenues, when accounting for inflationary factors, remained flat while spending increased by three percent;

As finance officers look to the close of 2008, they predict revenues and spending will decline in inflation-adjusted terms, with revenues decreasing 4.3 percent and spending decreasing by 1.5 percent;

Property tax revenue increased by 6.3 percent in 2007, but is predicted to decline by 3.6 percent by the close of 2008;

Spending pressures stem from rising costs, such as energy and fuel prices, public safety and infrastructure needs, and employee-related costs for health care, pensions and wages;

To balance annual budgets and meet ongoing spending needs, many cities are increasing fees and charges for services; and,

Ending balances, or “reserves,” remain at high levels and will provide a buffer against the current downturn.

Since an overwhelming number of local governments depend on property taxes to raise revenue the current housing crisis has affected local revenue. At the time of the survey, most respondents stated they did not have information documenting the impact of foreclosures in their communities; however, 40 did respond and stated the rate of foreclosure increase by 60 percent from 2006 to 2008. In addition to property taxes, some local governments rely on sales taxes or local income taxes. Most respondents expect revenues to decline from these sources as well. Many of the respondents stated the impact of the national economic conditions will still be felt by local governments in 2009 and 2010.

The current economic climate is also adversely hurting working families. The Working Poor Families Project, Working Hard, Still Falling Short, which states far too many families are working hard but still did not earn enough income to achieve economic security.

The project reviewed U.S. Census data which revealed:

1. More than one in four working families with children, a total of 9.6 million, is low-income;

2. More than 21 million children live in low-income families;

3. The number of low-income working families increased by 350,000 from 2002 to 2006;

4. Income inequality among working families increased by almost 10 percent from 2002 to 2006;

5. These families lack the earnings to meet their basic needs; and,

6. The report states public policies which promote education and skills development, quality jobs, health care and family leave are effective ways to foster family economic security.

The report also seeks to refute myths about low-income families:

1. Seventy-two percent of low-income families work;

2. The average annual work effort for low-income working families is 2,552 hours, roughly one and one-quarter full-time jobs;

3. Fifty-two percent of low-income working families are headed by married couples;

4. Sixty-nine percent of low-income working families have only American-born parents;

5. Eighty-nine percent of low-income working families have a parent between the ages of 25 and 54;

6. Forty-three percent of low-income working families have white, non-Hispanic parents; and,

7. Twenty-five percent of low-income working families receive food stamp assistance.

The report states the federal government should make a commitment to pursue four goals:

1. To increase the number of working adults enrolled in and completing education and skills development programs;

2. Increase the number of good jobs and increase wages and benefits for low-income workers;

3. Increase economic opportunities for low-income families; and,

4. Regularly assess the challenges facing this group and how the government is responding to their needs.

Interesting Reads

The Reckoning
Building Flawed American Dreams
By David Streitfeld and Gretchen Morgenson
The New York Times


SPECIAL FOCUS
2008 ELECTION GUIDE
Who's Better for Housing?
AFFORDABLE HOUSING FINANCE • October 2008
BY DONNA KIMURA AND BENDIX ANDERSON


SPECIAL FOCUS
2008 ELECTION GUIDE
Industry Leaders Speak Out on Candidates, Election
AFFORDABLE HOUSING FINANCE • October 2008
BY AFFORDABLE HOUSING FINANCE STAFF


SPECIAL FOCUS
2008 ELECTION GUIDE
Unfinished Business
AFFORDABLE HOUSING FINANCE • October 2008
What the next president must know about housing and HUD
BY AFFORDABLE HOUSING FINANCE STAFF


THE CRASH Risk and Regulation
What Went Wrong
By Anthony Faiola, Ellen Nakashima and Jill Drew
The Washington Post


Smaller Banks Resist Federal Cash Infusions
By Binyamin Appelbaum
The Washington Post


Birmingham on the brink (of bankruptcy)
By David Whitford, editor at large
Fortune Magazine


Foreclosures, Falling Prices Spur Pr. William Home Sales
By Nick Miroff
The Washington Post


When Fannie and Freddie Opened the Floodgates
By Stuart Taylor
National Journal Magazine

Read more »

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.


Interesting Reads

Parties Jockey for Advantage on Economic Aid
Associated Press

Rising Housing Costs Outpacing Income
By Alex Veiga
Associated Press

Blame Game Gets Nasty When It Targets the Poor
By Michelle Singletary
The Washington Post

As Larger Banks Crumble, Local Firms See Rush
By Brigid Schulte
The Washington Post

Detroit’s Ills Symptomatic of a Manufacturing Plague
By Peter Sleven
Washington Post Staff Writer
The Washington Post

Fannie Mae and Freddie Mac must go
We tried privatizing them before, in 1968. It didn't work.
By David G. Oedel
The Christian Science Monitor

McCain Plan Draws Doubts From Experts On Mortgages
By Dina ElBoghdady
Washington Post Staff Writer

A rising tide of ‘underwater’ homeowners
1 in 6 now owe more on their mortgage then their property is worth
By James R. Hagerty and Ruth Simon
The Wall Street Journal

Campaign 2008

THE COOK REPORT
A Tie Goes To The House
Democrats now control 27 states' delegations, but that may not be enough to break an Electoral College deadlock.
By Charlie Cook
The National Journal Magazine

Read more »

CRA: A Tool for Local Agencies

Last week aviewfromdc held the position that local housing and community development organizations needed to explore relationships with local lending institutions to generate additional funds. It is our opinion the bail out and other federal priorities will make it extremely difficult and highly unlikely local agencies will see an increase in federal funds. Nothing has occurred in the past week to change that assessment. In fact, the vents of the past week have reinforced our view that local agencies need to be more creative in seeking additional funds to serve their low- and moderate-income population.

One tool which can be used to generate additional resources is the Community Reinvestment Act (CRA). In this issue we are providing our readers with a summary of the act taken from the National Community Reinvestment Coalition web site. We also encourage our readers to visit the Federal Financial Institutions Examination Council’s web site as well. This week we would like to provide a summary of the act. For more detailed information on how an agency can use CRA for it local purposes, we recommend visiting NCRC’s site for a manual and other resources highlighting the use of CRA.

CRA is an act which was passed in 1977 to establish a framework to monitor the lending, investment and services offered by lending institutions in low- and moderate-income communities. Four federal agencies are responsible for monitoring financial institutions: the Office of the Comptroller of the Currency examines nationally chartered banks; the Office of Thrift Supervision examines savings and thrifts; the Federal Deposit Insurance Corporation and the Federal Reserve Board monitor state chartered banks.

Banks are examined according to size to determine their responsiveness to community needs. For example, institutions with more than $1 billion in assets are reviewed differently from institutions with fewer resources. They are subject to a more rigorous exam which considers the performance context of the lending institution. Those with less than $1 billion in assets but more than $250 million are subject to a streamlined test. Institutions with less than $250 million in assets are subject to five criteria in their examinations: the loan to deposit ratio; the percentage of loans in the bank’s assessment area, the bank’s distribution of loans to individuals of different income levels and businesses and farms of different sizes, the geographic distribution of loans, and the bank’s record of responding to written complaints about its lending performance in its assessment area.

NCRC has a wealth of resources available to local leaders interested in learning more about CRA and how their local banks fair under the law. They also have a section on their web site which refutes the comments of conservative commentators who blame CRA for the current mortgage crisis.

Interesting Reads

Housing and Community Development

Multifamily Bond Market Stalled as Rates Soar
By Liz Enochs
Affordable Finance News

Affordable Housing Feels the Pain
By Donna Kimura
Affordable Finance News

Why This 'Credit Crisis' Hits Everyone
By Dave Kansas
The Wall Street Journal

South Side Story
Starring Barack Obama, Emmett Till, Richard Wright, Mahalia Jackson, Martin Luther King Jr., Muddy Waters, Harold Washington, Richard J. Daley And a Cast of Thousands
By Wil Haygood
Washington Post Staff Writer
The Washington Post

Pressured to Take More Risk, Fannie Hit a Tipping Point
By Charles Duhigg
The New York Times

The End of Prosperity?
By Niall Fergusan
Time Magazine

Viewpoint: Minorities a convenient scapegoat for U.S. financial woes
By Cynthia Tucker
The Baltimore Sun

Campaign 2008

In Ordeal as Captive, Character Was Shaped
By Michael Dobbs
Washington Post Staff Writer
The Washington Post

U.S. Fiscal Crisis Seems to Have Altered Political Map
By Anne E. Komblut and Dan Balz
Washington Post Staff Writers
The Washington Post

Economic Unrest Shifts Electoral Battlegrounds
By Adam Nagourney and Jeff Zeleny
The New York Times

Read more »

Future Increases in Funding for Housing and Community Development Programs in Doubt after Bailout

The final agreement for the largest bailout in US history makes it highly unlikely there will be any significant increases in funding for housing and community development programs in 2009 and beyond. The final cost of the bail out could reach upwards to $1 trillion leaving serious questions about how other critical issues will be funded. These issues include affordable health care, alternative energy, the fight against terrorism, Social Security, Medicare and Medicaid reform. According to The Washington Post, in 2011 the Social Security Trust Fund will no longer be an option for Members of Congress to tap into when they need additional funds. That year is when the first wave of baby boomers will retire. Even thought the bailout is expected to be off-budget, significant increases in public funding will probably not be available.

While details of the bailout are still being finalized we do know it does not include funding for the housing trust fund which was part of the Housing and Economic Recovery Act of 2009. That bill was enacted to assist homeowners who are facing foreclosure. Failure to include funding for this initiative is a clear indication that funding for affordable housing and community development programs may be difficult to secure in 2009 and beyond. Given the way the community development block grant (CDBG) and HOME programs are structured, they are more likely to see increases in funding. A case can be made they can stimulate local economies.

Public housing authorities in particular need to change their relationship with the Federal government and more aggressively seek deregulatory flexibility to pursue private capital. It may seem counter intuitive given the financial situation the country finds itself in, but private money will be available for those agencies with strong financials. This fiscal crisis is a result of mortgages issued to families and individuals who could not afford the homes they were buying. Those with good credit and strong financials should find private money available.

All of this comes at potentially a bad time for housing authorities. If Democrats control Congress in significant numbers, there could be efforts to restrict the ability of housing authorities to act in a timely and appropriate manner to meet their agency’s needs. For example, there could include efforts to reinstitute the one-for-one replacement rule which requires one new unit of public housing for every unit demolished. This provision could increase the cost of funding affordable housing initiatives and in some markets, restrict new production due to the cost of land and buildings. Agency efforts to convert public housing units to vouchers will be more difficult as will efforts to expand the Moving to Work (MTW) demonstration. MTW allows an agency to combine housing funds into a program which better suits its local needs. This new design could be in the form of a block, categorical program or both. Community development agencies could face deeper targeting of local resources which could inhibit community and economic development efforts.

Groups representing these agencies need to rethink their strategies. A predominately Democratic Congress will, by and large, not be hospitable to the agencies; they are more likely to be resident friendly. While there may be a token increase in funds, there will also be an increase in regulations negating local flexibility. These groups need to be more aggressive in challenging Congress and the Department in Housing and Urban Development (HUD) in pursuing deregulation.

In order for housing agencies to function in this current environment, the following needs to occur:

- HUD also needs to be restructured in wholesale way. The department’s current structure is outdated and too slow to respond to local needs. It needs to b restructured in a way which allows quick decisions to respond to local markets.
- The CDBG program should be the model for how programs are administered.
- Current staff needs to be revitalized but more importantly new staff needs to be brought in with the understanding of how public-private ventures operate in real time. Local housing and CD agencies, including public housing authorities, need staff at the Federal level with the knowledge, expertise and experience to oversee mixed finance projects in a timely fashion.
- Local agencies need to learn how the Community Reinvestment Act (CRA) can be used to assist in the acquisition in private capital.
- Agencies need to pursue increases in the low income housing tax credits (LIHTC).
- Local housing authorities should pursue Medicaid waivers to convert properties to assisted living facilities to meet the needs of their elderly residents.

Magazine Offers White Paper on Housing Policy

Affordable Housing Finance Magazine in conjunction with its advisory board is prepared to present a housing policy white paper to each of the presidential candidates soon. The white paper is summarized in the magazine’s October 2008 issue.

Among the recommendations to be presented to the candidates are:

1. To shift decision-making from the central offices of the Department of Housing and Community Development (HUD) to its field offices;
2. HUD, not the Federal Emergency Management Agency (FEMA) should be the lead agency for permanent replacement housing and not emergency housing who people are displaced due to floods, hurricanes and other disasters
3. In disseminating funds from the Housing and Economic Recovery Act of 2009 to assist state and local government efforts to halt foreclosures, HUD should delegate authority to these entities to ensure quick action is taken before marginally healthy neighborhoods decline too steeply.
4. In reviewing regulations, efforts should be made to ensure energy efficiency is achieved through any changes in regulations.
5. HUD should embrace public/private partnerships versus the current model of program administration and implementation. The Low Income Housing Tax Credit (LIHTC) is a perfect model according to the magazine.
6. A homeownership tax credit should be created and directed at homebuilders not buyers.
7. More money should be invested in the rural rental housing assistance program.
8. Finally, there should be a national discussion on a variety of topics including infrastructure improvements, integrating housing and health care for the elderly and creating an intersection between housing and transportation.

Interesting Reads

Bailout Plan Gains Key Support
By Henry J. Pulizzi, Corey Boles and Michael R. Crittenden
The Wall Street Journal

MORTGAGE CRISIS
How Fannie -- and You -- Bought a Hapless House
By Joel Achenbach
Washington Post Staff Writer

How the Rescue Affects Homeowners
By Kenneth R. Harney
The Washington Post

Smaller Banks Thrive Out of the Fray of Crisis
People Shift Money From Wall St. to Main St.
By Binyamin Appelbaum
Washington Post Staff Writer

FROM THE ACADEMICS
Away from Wall Street, Economists Question Basis of Paulson's Plan
By Neil Irwin and Cecilia Kang
Washington Post Staff Writers

A Bailout We Don't Need
By James K. Galbraith
The Washington Post

Affordable-Housing Goals Scaled Back
Fannie Mae, Freddie Mac to Provide Less Support Than in Years Past
By Zachary A. Goldfarb
Washington Post Staff Writer

Read more »

Housing, Community Development Programs Spared by Fannie, Freddie Bailout Decision

The takeover of Fannie Mae and Freddie Mac includes a decision to fund the bail out off budget. This means funding for the bail out will not be subject to congressional budget rules requiring off sets for every dollar spent. This provides some assurances that no cuts will occur to housing and community development programs as offsets to fund the bail out.

A potential casualty to the bail out; however, could be the housing trust fund which was part of the bill passed this summer to forestall the mortgage crisis. Funding for the trust fund was based on profits generated from the profits from Fannie Mae and Freddie Mac. A condition of the Federal take over ensures that the Federal government is the primary beneficiary of any profits generated by both entities. Therefore, shareholders are at the back of the line of any efforts to recoup losses from the devalued stock of Fannie Mae and Freddie Mac. Even with assurances that the Federal government is the primary beneficiary of future profits there are no guarantees any of those profits will be directed to the trust fund. This could be a major blow to advocates of the trust fund who worked so hard for years to get the initiative enacted into law. Rep. Barney Frank (D-MA), chair of the House Financial Services Committee, has indicated a commitment to provide resources for the trust fund but it may take years before those funds materialize.

The take over is the right move for the government to do at this time. It will help stabilize the market, keep interest rates low and hopefully result in fairly reasonable affordable housing goals for each entity. Fannie Mae and Freddie Mac's inability to establish clear affordable housing goals has been contentious over the years.

The biggest losers in this takeover are shareholders of Fannie Mae and Freddie Mac stock. According to The Washington Post, Fannie Mae’s stock fell from a 52 week high of $68.60 to 73 cents a share. Freddie Mac’s stock fell from a 52 week high of $65.88 to 88 cents. While staff has been assured their positions and salaries are secure at this time, many have probably seen their retirement fund or college savings eliminated.

Group Publishes a Fiscal Guide for Voters

The US Budget Watch has releases a report, Promises, Promises: A Fiscal Voter Guide to the 2008 Election provides a summary of the policy initiatives proposed by presidential candidates John McCain and Barack Obama. The report summarizes their policy proposals and provides a fiscal estimate of their costs and impact on the Federal budget. The report is part of an initiative by the Committee for a Responsible Federal Budget. The committee is a bipartisan, non-profit organization committed to educating the public about issues that have significant fiscal policy impact.

Interesting Reads

U.S. Seizes Mortgage Giants
Government Ousts CEOs of Fannie, Freddie;
Promises Up to $200 Billion in Capital
By James R. Hagerty, Ruth Simon and Damian Paletta
The Wall Street Journal

What the Takeover Means for Your Mortgage
The Washington Post

Housing market not out of the woods — yet
Fannie, Freddie takeover stops the bleeding, but recovery will be slow
ANALYSIS
By John W. Schoen
Senior producer
MSNBC

Mortgage Giants’ Future: Rebuild or Teardown?
By Stephen Labaton and Edmund L. Andrews
The New York Times

Where Was Sen. Dodd?
Playing the Blame Game On Fannie and Freddie
By Al Hubbard and Noam Neusner
The Washington Post

Mortgage Giants' Mess Falls to Their Regulator
By David S hilzenrath and Zachery A. Goldfarb
Washington Post Staff Writers

How Washington Failed to Rein In Fannie, Freddie
As Profits Grew, Firms Used Their Power to Mask Peril
By Binyamin Appelbaum, Carol D. Leonnin and David S. Hilzenrath
Washington Post Staff Writers

Editorial
Bailout Hide and Seek

Read more »