Foreclosures: Enterprise analysis of Neighborhood Stabilization Program

Posted: April 14th, 2009 | Author: mfguide | Filed under: Finance, Investment, News | 1 Comment »

The folks at Enterprise Community Partners have released a thorough interim analysis of the proposals for HUD’s Neighborhood Stabilization Program (56-page PDF Report).

Eligibility for the NSP program is limited to CDBG recipients and 1st round funding must be disbursed within 18 months of April 2009. It’s not clear when 2nd round money must be disbursed by recipients. Given the very tight cycle of rule writing, allocation, and disbursement, this lengthy research document is both well done and a welcome discussion piece.

[Note: HUD has lots of resources including a 1.5hr kickoff video.]

Enterprise’s report reviews the proposed uses of 87 of the 306 NSP funding recipients (58% of total 1st round funding) and identified 7 “promising approaches”:

1. Acquisition and discount strategies
2. Disposition strategies
3. Geographic targeting
4. Green building and rehabilitation strategies
5. Income targeting and long-term affordability
6. Leveraging NSP funds
7. Partnerships and management

Cherry picked areas of interest:

Acquisition strategies reflect the diversity of local experiences and the dispersed nature of the foreclosed properties, and include both individual property purchases and bulk asset purchases. The likelihood of one strategy or another depends not only on the pattern of foreclosure but also on the preference of the funding recipient to focus on specific neighborhoods or to make select investments in relatively stable neighborhoods to prevent further deterioration. Funds from NSP can be used for acquisition and rehab, but not for operating expenses or maintenance. This limitation highlights the need to either dispose of these assets upon rehab completion or to use secondary financing (or rental proceeds) to meet ongoing financial obligations.

Disposition seems to reflect a traditional bias in favor of ownership, and provide for homeownership counseling and DPA. I’ll note my objection to DPA, but the full case is amply made at Calculated Risk. In short, DPA increases costs to borrowers (someone has to recover the DPA), and psychologically reduces the ‘at risk’ component of home equity. What looks more promising is a loan guarantee or reserve use, such as that pursued by Chicago and Atlanta. This allows NSP recipients to maximize the utility of their funding because they can provide a guarantee of a portion of the purchase price rather than devote the full amount to the purchase. There are some lease-purchase and rental programs that do acknowledge the likelihood of depressed pricing or inability of some people to afford the obligations of ownership.

Top 100 Foreclosure Markets by MSA, 2008

Geographic targeting is a mixed bag. Enterprise notes that the funds must be disbursed within 18 months, which is far faster than the HUD’s HOZ program, which has shown the importance of extended funding horizons. Furthermore, geographic targeting could be politically difficult if results are not quickly seen or if funding is concentrated in a limited number of areas. Nevertheless, a variety of data sources, including HUD census tract data, postal service vacant address records, and locally generated data have helped reduce the amount of study required for geographic targeting.

A variety of sustainable building strategies are identified. Reducing ongoing costs are essential for stabilizing these properties in the short and long term. Any efforts to meet third party criteria are welcomed.

I think the income targeting components are the most questionable and will be the hardest to implement. I would recommend additional (or substitute) qualifications that aid qualified government workers (teachers, emergency workers, e.g.), supportive housing/co-housing (which can call upon additional public and private funding), or use of an existing mechanism to identify potential renters or owners. The 18 month deadline just makes it too tight to invent a new process.

Leverage of NSP funds should produce the greatest amount of benefit and allow lenders to recoup some of their tarnished reputations. Again, the short time period in which to identify spending or property purchases will limit the spread of this technique, I believe that multiplying NSP funds through leverage is the best way to provide the greatest good. Through the use of credit enhancements, revolving loans, loss reserves, or additional HOME or CDBG funding, leverage will allow NSP recipients to achieve more for their efforts.

I’ll have to better understand the legislation and the guidance, but proper use of leverage could also support the creation of ongoing community oriented enterprises such as non-profit ESCOs or state-backed enterprises.

Crafted and implemented within a short period, the NSP represents a substantial source of funding and innovation for communities with foreclosure risks. The Enterprise report provides an excellent summation of the legislation and a welcome starting point for implementation.

[Update: Here’s HUD’s FAQ on expenditure timelines:
TIMELINESS OF USE & EXPENDITURE OF NSP FUNDS

How long do States and local communities have to spend this money?

Grantees have 18 months to obligate these funds, and four years to expend funds. Congress was very clear that this money be put to work quickly. In some areas, this level of federal funding will be unprecedented. Thus, HUD expects that grantees will have contracts signed or, at minimum, made written offers for properties within 18 months. Options or other non-binding instruments are not acceptable.

Congress was very clear that there is an urgency to deal with a national housing crisis.

How does HUD determine when NSP funds have been obligated?

As stated in the NSP Federal Register Notice page 58332, “Funds are obligated for an activity when orders are placed, contracts are awarded, services are received, and similar transactions have occurred that require payment by the state, unit of general local government, or subrecipient during the same or a future period.”

What will happen if grantees don’t obligate their funding within 18 months?

HUD will recapture the funds.

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