The struggle begins to successfully design a TX Neighborhood Stabilization Program

I have previously expressed concerns about how the new Neighborhood Stabilization Program (NSP) can be successfully implemented. I attended a public hearing last Friday in which officials of the Texas Department of Housing and Community Affairs (TDHCA) explained their proposed rules for how the program would be carried out.

The NSP program is an attempt to allow local communities to purchase foreclosed properties and to either rent or resell those properties to low income families. Any time a new program like this comes along there is a scramble to figure out how to best carry it out and to establish rules and procedures governing the use and distribution of the funds.

The now regular battle between the Department and its nonprofit contractors surfaced during last week’s public hearing. TDHCA’s governing board has, as a matter of policy, insisted that funds made available by the Department to contractors take the form of loans instead of grants. This stems from a desire to maximize the amount of funds returned to the Department so that the funds can be “recycled” to additional projects. A secondary concern of the Department’s has to do with accountability to HUD. Money advanced as loans to families buying homes under the NSP program constitutes “program income” in HUD’s eyes and the state is on the hook for the proper use of these funds.

From the perspective of the nonprofit contractors they would like to be able to hold on to the money as it is repaid by the borrowers so that they can assist other families. While there is a significant amount of money available for the program, the amount going to any one particular contractor is not that large. Thus the contractors face the prospect of designing and implementing a program that serves relatively few families over a short duration. Many potential contractors question whether it is worth their time and effort to set up to undertake such a program.

Aside from this issue between the Department and its contractors there are a number of other important public policy questions. Principal among these are:

  • Will the program be administered in a manner that expands the opportunities of low income and minority families to move outside traditional areas or will it reinforce existing segregated housing patterns?
  • Will the program be truly affordable to very low income families (those earning less than 50% of the area median income) or will they be effectively excluded from the program due to underwriting and loan terms?
  • How can the program be designed to help very low income families buy foreclosed home and not get in trouble and face foreclosure in the future due to their often tenuous low incomes?
  • Will rental housing purchased under the program end up housing very low-income families or will it instead be relegated to higher income households who can pay market rents?
  • While HUD requires contractors to each provide a sizable portion of their funds to assist very low income families, how can TDHCA ensure that the contractors actually follow through on this commitment?

Here are our answers to these questions that we have submitted to TDHCA…

1) In order to further the obligation of TDHCA and program recipients to affirmatively further fair housing in compliance with the HUD regulations I recommend that an absolute priority be given to applications for activities involving the purchase of rental housing in “high opportunity” and nonminority segregated communities for use in conjunction with a “moving the opportunity” or other affirmative fair housing marketing program.

2) In order to affirmatively further fair housing the Department should require applicants to adopt a fair housing marketing plan that effectively assists minorities to consider housing opportunities for the purchase of single-family homes in nonminority majority communities. The Department should review these plans to ensure their adequacy and effectiveness and should require reports of all applicants regarding the race and national origin of program beneficiaries and the ethnic composition of the census tracts the beneficiaries purchased housing in.

3) In lieu of a down payment families purchasing homes under the program that have incomes below 50% of the area median family income should be allowed to participate in a state certified self-help housing program for Habitat for Humanity program through which they could substitute “sweat equity” in lieu of a down payment.

4) The cash down payment requirement for families with incomes below 50% of the area median family income should be reduced to $500.

5) Homeownership counseling should be required of all families purchasing homes under the program. The counseling should be provided by a HUD certified housing counselor. The Department should prescribe minimum requirements for prepurchase homebuyer counseling. The quality of the counseling is essential to the success of the program and the Department should invest the necessary funds to ensure the quality of the homebuyer counseling.

6) In instances where the local sponsor has a demonstrated capacity to successfully service mortgage loans of extremely low or very low income borrowers the Department should allow the local sponsor to provide loan servicing.

8 ) In all cases involving loans to families earning less than 50% of the area median family income, special provisions should be made within the structure of the loan to allow flexible terms to avoid future foreclosure. The borrower should be made aware of these special loan terms through the prepurchase homeownership counseling. The Department should establish procedures that recognize the precarious situation of a borrower at 50% of median family income. Any temporary loss of work, caused by the broader economic circumstances our nation faces or by family illness or family break up will likely place the borrower in loan default. The way to accommodate these situations and to prevent foreclosure is to build into the loan a process for loan abatement or payment reduction triggered by specific circumstances identified by the Department. Upon application by the borrower the Department would automatically agree to abate loan payments for a reasonable period of time or reduce payments by extending the loan term. This could operate in a manner similar to the US Department of Agriculture Section 502 loan. We strongly believe that a failure to build these type of accommodations into the loan product and make the borrower is aware of and encourage them to quickly communicate changing financial circumstances to the Department will result in an excessively high rate of foreclosures among this borrower population.

9) The single-family homeownership loan requirements is supplied in the draft plan are inadequate. The requirements need to be simple and easy to understand.

The loan must be:
– fixed rate loan for 30 years (no adjustables that can change)
– be affordable (X percent of gross income) including taxes and insurance
– lender must escrow for taxes and insurance
– borrower pays not more than 3 percent of the amount of the loan for any and all loan fees paid to any person (lender, title company, courrier, broker, etc.). This way the Department and homeowner can compare the loans apples to apples.

Loan forgiveness should not considered income for tax purposes. Borrowers should not get a 1099 for the amount forgiven each year.

Before the loan can be refinanced or before a second lien can be made including a home improvement loan, or home equity loan, the homeowner must be counseled on the risks, etc. by a HUD approved housing counselor.

10) All rental properties receiving assistance under this program should be required not to discriminate against renters who seek to use a Section 8 Housing Choice Voucher. Minimum income requirements for renters should not exceed those allowed in the low income housing tax credit program as established by state rule.

11) TDHCA should ensure that funding recipients successfully carry out the income targeting requirements under the program by requiring each recipient to demonstrate At regular intervals that sufficient progress has been made on that portion of their plan directed at providing assistance to families earning below 50% of median family income as a pre-requirement for being able to expend any funds received from the Department for programs assisting higher income households.