How HUD will spend $4 Billion

October 14th, 2008 by Matt DiChiara| Posted in Weekly News Update | No Comments »

With all the news about the $700 Billion dollar federal bailout of the mortgage industry, and the stock market’s reaction to the initial failure of its passage in the House of Representatives, many have forgotten all about how difficult it was for Congress to agree upon HR 3221, the Housing and Recovery Act of 2008 this past summer. We covered the bill’s development into law this summer in our political corner.

One of the more contentious provisions, one that the White House had originally planned to veto, was the $4 billion dollar Community Development Block (CDB) grant. Since the bill was passed into law on July 30 HUD has had 60 days to come up with a plan on how to distribute the funds to state and local governments.

HUD Secretary Steve Preston announced the allocation plan on September 26, under the new Neighborhood Stabilization Program; we are sure that officials and technocrats at HUD were logging long hours and are glad they made the Congressional deadline with 4 days to spare. Let’s see how they came up with the numbers in the above chart.

The funds are to be used, as delineated by Congress as follows (numbers reference cited section of HR 3221):

1. To establish financing mechanisms for purchase and redevelopment of foreclosed upon homes
2. To purchase and rehabilitate homes that have been abandoned in order to sell, rent or redevelop
3. Establish land banks for homes
4. Demolish blighted structures(2301(c)(3)

The funds are to be allocated to the areas in greatest need based on:

1. The number and percentage of home foreclosure in each area
2. The number and percentage of homes financed by a subprime mortgage
3. The number and percentage of homes in default or delinquency in each area (2302)

The language of the bill requires that each state is allocated at least .5 percent of the total funds, which is $19.6 million. Also of note is that if a local government is deemed by HUD to receive $ 2 million or less, than the amount is to be included in the state government grant. This is because the allocation is a one- time deal, and it would cost close to 2 million dollars to set up the staffing necessary to carry out the program at the outset.

HUD determined the need for funds for each state based on the following breakdown:

1. 70 percent on the number of foreclosures
2. 15 percent for subprime homes
3. 10 percent for loans in default
4. 5 percent for delinquent loans

HUD then determined which local governments would need funds by coming up with a model foreclosure rate based on decline in home values, percent of all loans that are deemed
“high cost” (3 points above Treasury security of comparable maturity) and unemployment rates in U.S. counties. This model foreclosure rate is then applied to each locality within the state to determine which towns and cities are eligible for funds.

There are a lot of formulas involved and a more detailed ‘governmentese’ description can be found here.

The questions we have, and perhaps people out there may have some better answers, how the recent bailout of mortgage lenders will work with the state and local grantees. It sounds like state and local governments will be purchasing homes and mortgages to mitigate community blight and at the same time the U.S. government will be purchasing mortgages written off my commercial and investment banks. Did the U.S. government make a good move investing 4 billion in homes and mortgages that it would eventually have to purchase anyway?