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‘Tis the Season for Government Folly, Fa La La La La La La La L.A.!

Christmas comes but once a year, but there is no end to misguided federal efforts to solve the crisis of the day. Leaving aside the collapsing financial sector, doomed US car industry, etc., the crisis de jure is the housing meltdown.* Lost in the current hysteria is the $4 billion Neighborhood Stabilization Program (NSP) passed by Congress in July to address the boatloads of vacant and abandoned housing caused by the subprime lending mess.** “Housing-Crisis Grants Force Cities to Make Tough Choices,” a December 5, 2008 Wall Street Journal article by Michael M. Phillips and Bobby White, highlights some of the problems with NSP while also illustrating the folderol that always emerges when the feds try to solve a problem quickly.

NSP funds are awarded on a “formula” basis, which means that HUD used some sort of alchemy to divvy up the $4 billion, probably to CDBG-eligible cities and counties. Of course, when tons of jurisdictions dip their cup in into the same punch bowl, it’s not surprising that some only get a sip. And, unlike competitive programs in which applicants actually have to demonstrate real need and workable solutions, the cities and counties just have to prepare a so called “action plan” for the NSP. As Hamlet so eloquently said, “ay, there’s the rub“.

The WSJ article tells the tale of Avondale, AZ, which “got” $2.5 million in NSP funds. So far, so good. The city is thinking about using 25% of these funds to rehab two vacant townhouses, fill in an abandoned pool and build two units on the site. That only leaves about 2,600 other vacant, foreclosed or nearly foreclosed housing units in the city to take care of. If I’ve done my math right, at this rate Avondale only needs $1.625 billion to solve their problem. Better still, despite the obvious crisis, no jurisdictions have been able to spend their NSP money because they have to have an approved action plan to get the funds, and HUD recently announced that all the submitted action plans required “substantial amendments,” which were due December 1. Who knows when the action plans, which are sounding more like inaction plans, will be approved, since even HUD drones have to take time off for a little shopping and egg nog this time of year.

Avondale’s start and stop efforts are playing out all across America. I was talking to one of our clients in South Central Los Angeles on Friday about the WSJ article and the slow motion Danse Macabre going on with public and private efforts to address the housing problems in L.A. Our client has been going to endless meetings to discuss the NSP program and is still waiting around for the amended action plans to be approved. When the plans are finally approved, the City and County will have to run RFP processes to select nonprofits like his to spend the money and do the work. In the meantime, this agency, which is an experienced YouthBuild provider that has built and rehabilitated hundreds of houses over the years, is doing nothing.

One irony of the housing crisis is that HUD has a perfectly good program, Section 203(k), to recycle vacant HUD houses by letting nonprofits, like our South Central client, buy them for a nominal amount, rehab them, and resell them to low-income buyers. Since there are thousands of vacant and foreclosed houses in LA, one would think the 203(k) program would be booming. Not so according to our client, who told me that virtually no 203(k) houses are available in LA. To use the 203(k) program, HUD must own the vacant house, meaning that the house must have been originally financed through the Federal Housing Administration (FHA). Due to the huge housing price increases in L.A. during the boom years, as a practical matter FHA financing could not be used because its loan limits were too low. So subprime private sector loans, sold to Fannie Mae and Freddie Mac, were used to finance the transactions, with the vacant foreclosed houses ending up owned by a gaggle of private lenders and investors, not HUD. Despite the established infrastructure for the 203(k) program, it is not being used to recycle the tsunami of vacant houses in L.A. and other cities, leaving our client and thousands of other similar nonprofit housing rehab organizations sitting on the sidelines.

This sad tale of woe does not make me optimistic about the really big stimulus programs that will emerge from Congress shortly. While it will be Fat City for grant writers and lots of grants will be available for frisky nonprofit and public agencies, don’t expect the funds to fix many problems.

Now that I’ve depressed you sufficiently, how about joining me in a Mai Tai or three, as I’ve recently reacquired a taste for aged rum. A fine Mai Tai helps pass the time waiting for action plans to be approved.

* For an earlier post on the current housing fiasco, see Déjà vu All Over Again—Vacant Houses and What Not to Do About Them.

**After the financial industry $700 billion October bailout and up to $35 billion possible for the auto industry, doesn’t $4 billion seem like a trifle only six months later?