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The Neighborhood Stabilization Program

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by Jim Schaafsma, MPLP Housing Law Attorney

As previously reported, Section 2301 of the Housing and Economic Recovery Act (HERA), enacted on July 30, 2008, appropriated nearly $4 billion to state and local governments for the purchase and redevelopment of abandoned and foreclosed upon residential properties (“covered properties”), creating the Neighborhood Stabilization Program (NSP). The act essentially says that NSP funds shall be treated as CDBG funds (HUD regards NSP funds as a special allocation of FY 2008 CDBG funding). It further prescribes that this money be allocated according to a “greatest need” criteria reflecting the number and percentage of home foreclosures, subprime mortgage loans, and homes in default or delinquency in each state or local government. As a result, HUD awarded Michigan and 22 of its local governments more than $263 million. (3rd highest among the states, trailing California and Florida; see Exhibit 1 for the distribution of the $263M; for MSHDA’s proposed action plan including its proposed distribution of the nearly $98.7M allocated to it, see Exhibit 2)

Eligible Uses   There are 5 “eligible uses” for these funds, which must be used within 18 months of receipt:
   
  • establishing “financing mechanisms” for the purchase and redevelopment of covered properties (such as soft second mortgage and shared-equity loans);
  • purchasing (at a discount) and rehabilitating (to code compliance) of covered properties “in order to sell (at or below cost), rent, or redevelop” them;
  • Monitor and engage in legislative and administrative education and advocacy efforts on issues related to elder abuse, neglect, and financial exploitation.
  • establishing land banks for foreclosed upon homes;
  • demolishing blighted structures;
  • redeveloping demolished or vacant properties.1

Income Targeting   All funds must be used for households with incomes at or below 120% of the area median income (AMI); at least 25% of funds must be used to provide housing for households with income at or below 50% of AMI. To the “maximum extent practicable” and for the “longest feasible term” properties that are sold, rented or redeveloped under the NSP shall remain “affordable” to the low-moderate income households noted above.

HUD Guidance

Action Plan   The act also lets HUD in its administration of NSP to “specify alternative requirements” to any CDBG provision, consistent with Section 2301. In issuing its notice implementing the program, HUD did specify such requirements, including that a state or local government allocated NSP funds submit an application for its allocation (“action plan”) by December 1, and that that application be for its total allocation. The action plan2 must be open to public comment for at least 15 days and be posted prominently on the grantee’s web site. The notice also defines several terms relevant to the program (e.g. “abandoned”; “blighted structure”; “foreclosed” – defined to include tax foreclosure)

Cooperation between local governments   The Notice also encourages local governments to consider applying for less than their full allocation, in which case the balance will pass to their state agency. It also encourages cooperation between local governments in several forms: joint requests from contiguous local governments; allowing existing CDBG cooperation agreements between city and county governments to cover NSP funding; and allowing a local government to forge a “subrecipient agreement” with another jurisdiction or a non-profit to administer the NSP grant. The guidance allows 10% of NSP funds to go to general administration and planning.

1 for 1 waived, relocation assistance not   The guidance waivers the One for One dwelling unit replacement requirement in the CDBG statute (the Housing and Community Development Act of 1974, at 42 U.S.C. 5304(d)), saying the requirement would be onerous for many local governments where there is a surplus of covered properties, as well as for HUD, and would “delay NSP program operations.” But, it does not waive the generous relocation assistance provisions of 5304(d) or the Uniform Relocation Assistance Act.

Certification   HUD requires that NSP grantees submit 14 certifications related to their NSP program, including that it will affirmatively further fair housing; that it is consistent with its HUD approved consolidated plan; that NSP funds will be used within 18 months; and that those funds will be used only “with respect” to households with income not above 120% of AMI.

HUD Website   The HUD guidance (Federal Register Notice) and much more information (see, e.g. detailed local foreclosure information under “NSP Grantee Data Resources Data” at the “Program Management Resources” link) about the NSP are available on HUD’s website: http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/

Advocacy tips

As noted above, NSP grantees must submit their action plans to HUD by December 1. These plans must be available to the public and online, and open to comment. The time for making comments on a proposed plan is now. In thinking about making comments to your local government, here are some areas to consider:
   
  • are resources adequately targeted to legal services eligible clients (households in the lowest income category – 30% and below the area median income). The legislation only requires that 25% of a grantee’s NSP allocation be used to provide housing for households with income at 50% of AMI and below. Grantees should be urged to set higher minimum requirements for these funds benefiting households in the 50% and 30% of AMI categories;
  • would the rents for housing produced with NSP funds be truly affordable to households in the 30% and 50% of AMI categories (a related question is whether the periods of affordability, defined in years, are adequate);
  • are the proposed uses of NSP funds consistent with the legislation and the greatest and most pressing needs of the community;
  • does the plan recognize the benefit of preserving existing occupancy in foreclosed properties by tenants or owners (the name of the program suggests that it should;
  • does the plan contain a preference for capable non-profit developers and entities.

Exhibit 1

 
MI MICHIGAN STATE PROGRAM $98,653,915
MI DETROIT $47,137,690
MI WAYNE COUNTY $25,909,153
MI OAKLAND COUNTY $17,383,776
MI MACOMB COUNTY $9,765,375
MI GENESSE COUNTY $7,506,343
MI GRAND RAPIDS $6,187,686
MI LANSING $5,992,160
MI WARREN $5,829,447
MI FLINT $4,224,621
MI KENT COUNTY $3,912,796
MI PONTIAC $3,542,002
MI SOUTHFIELD $3,241,457
MI REDFORD $3,041,364
MI WASHTENAW COUNTY $3,024,719
MI TAYLOR $2,495,056
MI STERLING HEIGHTS $2,454,961
MI DEARBORN $2,436,246
MI LINCOLN PARK $2,417,688
MI CANTON TWP $2,182,988
MI CLINTON TWP $2,147,608
MI WESTLAND $2,061,722
MI WATERFORD TOWNSHIP $2,014,489

Exhibit 2

MSHDA’s Draft NSP Action Plan

MSHDA is the state agency administering Michigan’s nearly $99M NSP “state program”. Observing that Michigan’s “generally affordable housing market” has meant that the neighborhood impacts of foreclosure are far more deeply felt in low and moderate income neighborhoods, MSHDA’s plan “prioritize[s] funding for high poverty communities with high projected foreclosure rates and high vacancy rates relative to other communities.”

Distribution and Uses of NSP funds MSHDA proposes to distribute money as follows:
   
  • $21.75 M to Non-NSP CDBG Entitlement Cities (17 cities whose NSP allocation under the HUD formula was less than $2M and so instead of getting their allocations directly, their funds were placed in the “balance of state” allocation awarded to the state). These cities must apply (consistent with NSP requirements and MSHDA’s plan) to MSHDA for NSP funds up to their HUD determined amount (to be released in increments as the localities meet program conditions)
        Ann Arbor $85,000     Battle Creek $1,950,000
        Bay City $550,000     Benton Harbor $200,000
        Dearborn Hts    $1,800,000     Farmington Hills    $1,300,000
        Jackson $1,700,000     Kalamazoo $1,700,000
        Livonia $1,450,000     Muskegon $1,450,000
        Muskegon Hts $400,000     Port Huron $1,250,000
        Roseville $1,450,000     Royal Oak $1,000,000
        Saginaw $1,600,000     St. Clair Shores $1,750,000
        Wyoming $1,350,000            
  • $10 M to projects that are innovative (in the area of affordable housing development and/or neighborhood stabilization) and or address urgent need (where it is documented that there is “an inadequate provision in both the HUD and MSHDA deployment of resources”)
  • $7.7 M for administrative costs (10% of the NSP grant is the HUD maximum)
  • $59.2 M – “Balance of the State of Michigan” which includes CDBG entitlement cities with HUD determined NSP amount under $500,000 and non-CDBG entitled area, as follows:
        Upper Pennisula $1.8M     Northern Lower Peninsula $2.7M
        Mid-Central $1.7M     West-Central $5.65M
        Capital Area $2.96M     Bay-Saginaw-Genesee $4.7M
        Thumb $1.47M     Southwest $2.52M
        South $3.22     Oakland $3.66M
        Macomb $2.32M     Wayne (excl. Detroit) $5.44M
        Detroit $21M            
    Of this $59.2M, $10M is awarded to the Michigan Land Bank Fast Track Authority for its “portfolio of NSP eligible properties that require demolition, site clearance and maintenance…as well as properties suited for rehabilitation and resale.”
MSHDA proposes the following (6) eligible uses/activities for NSP funds (it also identifies eligible applicants, methods of application – direct or RFP, eligible “end uses” and the number of NSP Units and dollars):
   
  • Financing mechanisms – interest reduction on MSHDA direct lending mortgages for multifamily housing – 100 units; $1M (20% for households 50% & below AMI)
  • Acquisition, rehabilitation, redevelopment of covered properties - 150 rental and 150 homeownership units; $18M (10-20% for 50% AMI)
  • Displacement prevention for foreclosed properties – 135 rental/homeownership units; $7.7M (10-20% for 50% AMI)
  • Land Banks – acquisition and disposition or maintenance – 225 units; $4M (10% for 50% AMI)
  • Demolition of blighted structures – site clearance for future redevelopment – 2,000 units; $20M
  • Redevelopment of demolished/vacant properties – 440 units and 3 public facilities; $38M (61% for 50% AMI)
The draft plan provides “specific activity information” for each of these eligible uses, including an “activity description”, requirements, and performance measures.

Definitions

“Blighted structure” – public nuisance under local code or ordinance; attractive nuisance because of condition or use; dangerous fire hazard; utilities/mechanicals disconnected/ineffective for a year or more.

“Affordable rents” – the HOME program definition (at 24 CFR 92.,252 – the lesser of the FMR or 30% of 65% of AMI, plus a utility allowance)

"Continued affordability" – the HOME program standard (minimum affordability period of 5-20 years depending on amount of funds expended per unit)

"Rehabilitation standards" – compliance with “local codes and standards”

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