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Congress Is Briefed on Plans to Fund Revitalization of Neighborhoods Hit by Foreclosures (04/30/09)

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April 30, 2009

Congress Is Briefed on Plans to Fund Revitalization of Neighborhoods Hit by Foreclosures
    by Robert Kropp

NSP funding requires communities to submit action plans detailing their spending, and report by Enterprise Community Partners is the first published effort to study the data. -- By late 2007, the effects of a weakened housing market and predatory subprime lending practices had led to the beginning of a national debate on the growing crisis in foreclosures. The crisis threatened not only homeowners faced with foreclosure, but also the communities that would be left with high concentrations of foreclosed properties.

Visit the
Prospectus Ordering Center"Vacant properties are like a cancer that can take down whole communities," said Ali Solis, Senior Vice President and Public Policy and Corporate Affairs Executive at Enterprise Community Partners. Enterprise is a nonprofit that operates the Enterprise Community Loan Fund, a Community Development Financial Institution (CDFI) that has loaned more than $725 million in low-income communities and helped build or renovate 91,000 affordable homes nationwide. Concentrations of vacant properties can lead to a host of ills, including decreased property values and sharp increases in crime rates.

Foreseeing the magnitude of the crisis—which according to conservative estimates would lead to a national foreclosure rate of 200,000 properties per month—Enterprise partnered with an extensive coalition of organizations to create Save America's Neighborhoods, a campaign that successfully lobbied for $3.92 billion in emergency stabilization funding included in the Housing and Economic Recovery Act of 2008.

The Neighborhood Stabilization Program (NSP), a new federal program, was developed to provide funding to localities in order to reduce the impacts of foreclosed and vacant properties on neighborhoods. The funds were authorized to be used for financing mechanisms for the purchase and redevelopment of foreclosed homes, the purchase and rehabilitation of abandoned and foreclosed properties, the establishment of land banks for foreclosed homes and residential properties, the demolition of blighted structures, and the redevelopment of demolished and vacant properties.

In order to qualify for the funding, state and local governments were required to submit action plans to detail how NSP funds would be used to address the foreclosure crisis and stabilize communities affected by widespread foreclosures and vacancies. According to Amanda Sheldon, Research and Policy Analyst at Enterprise, the action plans were written in relative isolation, with limited awareness of how other fund recipients were proposing to use the funds.

Enterprise reviewed and analyzed 87 of the 306 NSP action plans submitted to the Department of Housing and Urban Development (HUD), and issued its findings in a report entitled The Challenge of Foreclosed Properties. The report quantified the ways in which program intended to use NSP funding, and found that 56% would pay for purchase and rehabilitation, 21% would provide homebuyer financing, 13% would address redevelopment, 6% would pay for blighted structure demolition, and 4% would fund land banks. HUD defines land banks as "governmental or nongovernmental nonprofit entities that focus on the conversion of vacant, abandoned properties into productive use."

In addition to providing data on how recipients intended to use NSP funds, the Enterprise report also sought to identify effective strategies, financing mechanisms and program models. Sheldon, who is a co-author of the report, said, "We wanted to share promising approaches that we found in the 87 plans we studied."

Sheldon was impressed with the overall quality of the action plans submitted. "Given that these were first-time action plans for a new funding program, written with a strict deadline, we found that many of the strategies proposed have a good likelihood of success." According to the report, promising approaches were identified in the areas of acquisition and discount strategies, disposition strategies, geographic targeting, green building and rehabilitation strategies, income targeting and long-term affordability, leveraging NSP funds, and partnerships and management.

Among the promising innovative approaches indentified in the report was the inclusion of green building and rehabilitation principles in many of the action plans. "The funding encourages the use of green building principles, but does not include a requirement that they be used," said Sheldon. "Nevertheless, we found that 60% of the plans mentioned energy efficiency as a goal."

Leveraging of funds also stood out as an effective strategy for the use of NSP funds. "It would be a mistake if governments used the funds simply to buy a couple of houses," said Solis. "Blending public and private resources through social investing and philanthropy stands a much better chance of addressing the crisis."

"But even with leveraging, $4 billion in funding will hardly make a dent in a rate of 200,000 foreclosures a month," Solas observed.

As part of the American Recovery and Reinvestment Act (ARRA) signed into law this year, an additional $2.2 billion was provided for a second round of funding for the NSP. Funding for the second round of NSP will be allocated by competition. Included among the eligible entities for the second round of funding are nonprofits or consortia of nonprofits that may partner with for-profit entities.

According to the Enterprise report, identifying approaches that stand the best chance of becoming best practices is essential to preparations for the second round of financing. Furthermore, the long-term need for such financing will be more effectively supported by the data collected in the report. At present, NSP is designed to provide only short-term funding to address the foreclosure crisis.

"The report's breakdown by dollars of the five usages allowed by NSP for the first round of funding is the first time that the action plans have been scrutinized in this way," said Sheldon. Enterprise shared the findings of its report with 50 Congressional staff members on April 21.

"Staff members were there to be educated themselves, as well as to educate their constituents," Sheldon said. The staff members were especially interested in the report's policy recommendations, which include the restructuring or refinancing of mortgages to avoid foreclosure, the expansion of safe harbors offered to servicers for loan modifications, and the adoption of regulations for the NSP program that are clear, practical and user-friendly.

Representative Maxine Waters of California, who was instrumental in getting NSP funding included in the stimulus packages, described the briefings as "an informative first look at how NSP funds will be used by some municipalities around the country." She pointed out that Los Angeles, which holds about one-fourth of all California foreclosures, used NSP funding to help develop a walk-in homebuyer program under which eligible households will identify foreclosed single-family homes to purchase as their primary residences.

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