Stabilization of Housing Market Will Create Additional Public/Private Partnership Opportunities

January 1, 2009

By: Rita M. Connerly

These extraordinary economic times, with record numbers of foreclosures, the near collapse of the housing industry and instability in the lending and financial markets have prompted the federal government to take unprecedented actions in an effort to stabilize neighborhoods negatively impacted by, or facing, foreclosures. The nearly 700 page Federal Housing and Economic Recovery Act of 2008, signed into law on July 30, 2008, represents one of the government’s efforts to assist distressed homeowners and residential neighborhoods.

One of the significant components of the Federal Housing and Economic Recovery Act is the Neighborhood Stabilization Act, which allocates $3.9 billion dollars in emergency assistance to States and local governments that have been especially hard hit by foreclosures and the sub-prime crisis. The State of Colorado was allocated over $53 million. The largest portion of the funding was allocated to the State government and smaller amounts were allocated directly to Adams County, Aurora, Colorado Springs and Denver.

Funds appropriated under the Neighborhood Stabilization Program (“NSP”) must be obligated by the State or local government within eighteen months of receipt for one or more of five primary uses. Three of the eligible uses relate solely to foreclosed or abandoned residential properties: (1) establishing financing mechanisms for purchasing foreclosed homes and residential properties (such as soft-seconds and other down-payment assistance); (2) purchasing and rehabilitating homes and other residential properties that have been abandoned or foreclosed upon in order to sell, rent or redevelop them; and (3) establishing land banks for homes (but not for vacant land) that have been foreclosed upon. The other two eligible uses apply to any property type whether or not foreclosed upon, including commercial and industrial property in addition to all types of residential property: (4) demolishing blighted structures; and (5) redeveloping demolished or vacant properties (raw land is not eligible). An NSP grantee may use funding for multiple eligible activities on the same property.

Funds used to purchase and rehabilitate residential properties must be sold or rented to moderate-income individuals and families whose incomes do not exceed 120% of the area median income. Twenty-five percent of the allocated funds must be used to purchase and redevelop abandoned or foreclosed upon homes for persons and families receiving less than 50% of the area’s median income.

NSP funds may not be used to refinance existing mortgages or to execute residential short sales, and prevent foreclosure. The purpose of NSP is to stabilize communities by making funds available for acquiring and redeveloping properties that have already been foreclosed or abandoned.

A grantee’s profits from the sale or rental of NSP property over the next five years must be reinvested in affordable housing and neighborhood stabilization efforts. In most cases, program income received after July 30, 2013 must be returned to the Federal Treasury.

This short timeframe to commit and expend funds means that the State and local governments must contract with other public and private entities to quickly disperse capital funding into the market and begin implementation of critical strategies to foster economic recovery. A partnership between realtors, lenders, developers, contractors, non-profit organizations, governmental entities and other suppliers of materials and services will be necessary to assemble the requisite expertise, professional relationships and funding sources to implement and effectuate strategies that will promote stability for the benefit of this State’s neighborhoods, community and economy.

To posture your company or non-profit for receipt of a portion of the NSP funds, familiarity with the federal and local procurement process, funding mandates and compliance issues are crucial. For example, recipients of NSP funds should inquire into or receive professional advice regarding such matters as: the applicability of, and wage requirements arising from, the Davis-Bacon Act; any environmental mandates; the inability to recover maintenance costs (such as lawn mowing) if the property purchased sits dormant; the condition that an appraisal of the property be secured so that the purchase price does not exceed 95% of the property’s appraised value; the ability to recover reasonable developer fees to rehabilitate and sell the property; the restrictions on the sales price of an individual home to a homebuyer (sales price may be no more than the cost of acquisition and redevelopment, including closing costs); and the regulations permitting a grantee of funds to sell a rehabilitated residential building to an investor, developer or non-profit for a profit. These conditions are just a sampling of the local and federal regulations associated with accepting NSP funds. Other contractual requirements will include bonding, insurance, record-keeping and accounting of the sources and uses of the NSP funds.

The Housing and Economic Recovery Act also now permits purchasers of residential, federally assisted properties to use low income housing tax credits without regard to the “ten year hold rule”. This rule previously prohibited the use of such tax credits if the property had been sold or transferred within the ten years prior to a purchaser’s acquisition.

Opportunities such as those identified above are intended to further the government’s goal of stabilizing neighborhoods while simultaneously stimulating the economic climate for the State’s local business community and non-profit organizations.

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2009 Fairfield and Woods, P.C., ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:
Rita M. Connerly