By Eugene T. Lowe
April 7, 2008

CDBG – Foreclosure Prevention Act of 2008 (H.R. 3221) Title III of the bill would appropriate $4 billion to the Community Development Block Grant (CDBG) program for the redevelopment of abandoned and foreclosed properties. HUD would develop a funding formula to allocate the CDBG funds no later than 60 days after the bill becomes law. Funds would be allocated to local governments and states with the greatest need. Need would be determined by HUD based on three factors: number and percentage of home foreclosures in each state or local jurisdiction; the number and percentage of homes financed by a subprime mortgage related loan in each state or local jurisdiction; and, the number and percentage of homes in default or delinquency in each state or local jurisdiction. Funds would be available no later than 30 days after the establishment of the formula. Recipients would have to use the funds within 18 months by making loans, grants and other financing mechanisms to community development financial institutions, national intermediaries, and nonprofit housing or community development organizations and others to purchase and rehabilitate homes that have been abandoned or foreclosed upon in order to sell, rent, or redevelop such homes. Funds can also be used to establish financing mechanisms for the redevelopment of foreclosed homes, including such mechanisms as soft'seconds, loan loss reserves, and shared-equity loans for low- and moderate-income homebuyers. Funds can also be used to establish land banks for foreclosed homes and to demolish blighted structures. Any funds used for the purchase of an abandoned or foreclosed home must be at a cost equal to or less than the appraised value of the home based on the most up-to-date HUD appraisal. HUD would have the authority to waive, or specify alternative requirements for any provision or statute or regulation that is necessary except those relating to fair housing, nondiscrimination, labor standards or the environment. Funds would have to be used to assist households whose incomes does not exceed 120 percent of the area median.

On April 2, the Senate reached a bipartisan agreement on housing legislation that would include $4 billion in supplemental Community Development Block Grant (CDBG) funds targeted to the mortgage foreclosure crisis. Specifically, the bill H.R. 3221 (formerly S.2636) the Mortgage Foreclosure Prevention Act of 2008, would provide CDBG funds to “purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in house values of neighboring homes.”

In addition to CDBG, the legislation would increase the FHA loan limit, provide $10 billion in mortgage revenue bonds and $100 million in additional funding for housing counseling. The agreement is especially encouraging to the Conference of Mayors which has been in the forefront of the mortgage foreclosure issue with a November 2007 meeting in Detroit During its January Winter Meeting, the Conference called on Congress to quickly move on many of the provisions of the Senate agreement, especially CDBG and mortgage revenue bonds. The Conference of Mayors also supported a change to the bankruptcy code that was not included in the agreement.

The bipartisan agreement, worked out by Senators Chris Dodd (CT) and Richard Shelby (AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing and Urban Affairs, was not expected as members of Congress returned from the Easter recess. Before the recess, the bill (then S. 2636) could not get the 60 votes needed for consideration on the Senate floor. But after the recess, with the mortgage foreclosure crisis becoming worse and hearing from their constituents about the issue, Senators voted 94-1 on April 1 to debate the legislation. It was agreed even before the vote that there would be compromise legislation to S. 2636.

One compromise was how to treat a provision to change the bankruptcy code that would allow judges to modify the loans of families facing foreclosure. The issue was controversial and vigorously opposed by the lending industry which argued that such a change to the law could increase the interest rates to the homebuyer. The bankruptcy provision was removed from the agreement, but Senators allowed an amendment to be offered during floor debate to restore it in the final bill. On April 3, Senator Richard Durbin (IL), Majority Whip, introduced an amendment to include the bankruptcy provision. The amendment was tabled, and therefore killed, by a vote of 58 – 36.

As it is debated on the Senate floor (which is likely to continue through Tuesday, April 8), the bill is not without problems. Many think it is modest and will lead to no real resolution of the mortgage problem. The National Community Reinvestment Coalition says: “Several provisions of the bill deal with properties that have already gone through foreclosure, including $4 billion for local governments to purchase REO properties, a forward looking and useful provision. But one element of the bill, the $7000 tax credit for purchasers of foreclosed properties, remains too broadly defined and may reward speculators looking to capitalize on foreclosure.”

The bill also establishes a new property tax deduction for non-itemizers that would deny the new deduction to any resident of a locality that raises its property tax between April 2 and next January 1. In response, the Center on Budget and Policy Priorities says, “By preventing localities from raising tax rates to help compensate for shrinking property tax revenues, the provision could force many localities to cut police, schools, and other vital public services. It also would improperly pre-empt local taxing powers and pressure states to make up the lost local revenue even as many of them struggle with their own budget problems. And it would place unprecedented demands on the IRS that would likely make it impossible to administer.” The Conference of Mayors will oppose this provision when it comes to the House of Representatives.

House Speaker Nancy Pelosi (CA) is encouraged by the Senate agreement, but says that changes will have to be made. House Financial Services Committee Chairman Barney Frank (MA) also has legislation that addresses the foreclosure problem. The Administration, of course, is adamantly opposes much of the bill, especially CDBG and mortgage revenue bonds. For now, the White House is primarily pursuing FHA reform as the major response to the mortgage crisis.