The Housing Stabilization Program You Haven't Heard About

The Neighborhood Stabilization Program (NSP) isn't something you read a lot about in the news. Most headlines are grabbed by some of the government's more well-known interventions such as the home buyer credit and the Treasury's foreclosure prevention program. But all three are part of Washington's unprecedented effort to prop up the ailing U.S. residential real estate market. The NSP is a smaller endeavor, but its methods could be more effective than any of the others in staunching the housing market's bleeding while also creating jobs.

The NSP was first implemented through the Housing and Economic Recovery Act of 2008 (.pdf) during the Bush administration. It allocated $4 billion to "redevelopment of abandoned and foreclosed upon homes and residential properties." The Obama administration stimulus from 2009 added another $2 billion to the same effort. Through the program, municipalities can purchase foreclosed or abandoned homes, get them renovated and then subsidize their sale to new home buyers with low to moderate incomes.

Such government efforts are controversial, to be sure. Anyone who believes the government shouldn't be involved in propping up the housing market might oppose the program. But even critics can probably appreciate its lack of moral hazard -- the homes sold though this program have already been foreclosed. For it to be effective its funds should be used to accomplish three main goals: reduce the foreclosure inventory, increase employment and revitalize neighborhoods.

Individual municipalities have some flexibility over how they implement the program. A good case study can be found in Pompano Beach, a city in south Florida's Broward County. The NSP's 2008 legislation awarded the city $4.3 million in March 2009 due to its extremely high concentration of foreclosures.

How the Program Works

Interim Director Miriam Carrillo and Community Development Specialist Linda Connors of the city's Housing and Urban Development program provided a hypothetical example of how the program works:

  • First, city representatives review foreclosed properties and bid accordingly. Imagine they obtain one for $64,000 (which is their average purchase price).
  • Next, they need to bring the house up to code. So they put $50,000 into its renovation (again, the average cost). In total, they would have spent $114,000.
  • Then, they find a qualifying buyer (for example, a family of four with an annual income of between $56,950 and $85,440).
  • That buyer independently obtains pre-qualification from a bank for a mortgage of $84,000 to purchase the home (average sale cost is between $80,000 and $150,000).
  • The stimulus funding covers the $30,000 difference (and can cover up to $80,000 per transaction).
  • The subsidy is kept as a 2nd lien that disappears after 20-years, but must be paid before that if the house is sold. This is meant to prevent flipping.

How well does this program stack up to the criteria mentioned earlier?

Reduces Foreclosure Inventory

Only city residents who do not currently own a home are allowed to purchase a property through the Pompano program. That means each house sold necessarily reduces inventory. The new owners also must occupy the home. Having fewer properties for sale will result in house prices stabilizing more quickly.

Increases Employment

Another nice aspect of the Pompano program is its officials' decision to renovate the homes before sale. Through a competitive process, the city selects contractors to fix up the houses. South Florida's economy was heavily reliant on real estate during the bubble. As a result, the housing market's collapse brought on very high unemployment. As of February, the Miami-Fort Lauderdale-Pompano Beach metropolitan statistical area had an 11.3% unemployment rate -- higher than the national average of 9.7%, according to the Bureau of Labor Statistics. The construction jobs associated with this program will help employ some of those workers who would be otherwise jobless.

Revitalizes Neighborhood

The program also helps not only the homes it buys and renovates, but those in the surrounding area. When some of a neighborhood's homes increase in price and become more attractive, the other homes also benefit by their values increasing as well. Again, this will help home prices to stabilize.

Other Features

The program's design is also good from a fiscal soundness perspective. The funding allocated is all that will be spent: the city takes on no risk. Since private banks fund the mortgages, once the house is sold, the city can't lose more money than what has been allocated. The government lets banks worry about the creditworthiness of the individual, since the bank will be the one that incurs a loss if the new borrower defaults. And due to the subsidy, the borrower begins with a nice chunk of equity right-off-the-bat, which should lessen default risk.

Of course, Pompano's program is just one example of many neighborhood stabilization endeavors going on throughout the U.S. The details of other programs may vary, but the objective is the same: reduce foreclosure inventory and stabilize local economies.

(NAV Image Credit: edkohler/flickr)