On July 30, 2008, President Bush signed The American Housing Rescue and Foreclosure Prevention Act of 2008, Pub. L. No. 110-289 (H.R. 3221) (“Housing Act”). The Housing Act is intended to address the Nation’s housing crisis by providing relief directed toward mortgage giants Fannie Mae and Freddie Mac, as well as toward individual homeowners. This Alert is intended to focus on one key new feature of the Housing Act: creation of an entirely new federal grants program, funded at the level of $3.9 billion, which essentially provides for the purchase and redevelopment of abandoned and foreclosed homes.

New Federal Grants Program Created: Summary

Direct Appropriations: The grants program is contained in a new Title III to the Housing Act, “Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes.” The grants program is not a mere authorization, but is structured as a direct appropriation legislation. Essentially, this means that the direction of Congress is not subject to the unending appropriations controversies in recent congressional sessions, but is an immediate call on the Treasury of the United States for the intended purposes of the bill: “There are appropriated out of any money in the Treasury not otherwise appropriated for the fiscal year 2008, $4 billion, to remain available until expended, for assistance to States and units of general local government…for the redevelopment of abandoned and foreclosed upon homes and residential properties.” This alert is presented for informational purposes and is not intended to constitute legal advice.

Tight Statutory Deadlines: Title III establishes at least two astonishingly tight deadlines. First, that “an allocation based on a funding formula” be devised by administrative entity U.S. Department of Housing and Urban Development (“HUD”) “not later than 60 days after enactment of this section” [Sec. 2301]. Second, the legislation commands that “amounts appropriated or otherwise made available…shall be distributed…not later than 30 days after establishment of such formula.” Id.

Allocation Criteria: Courts have long recognized the ability of federal agencies to “fill in the gaps” that are left by generally stated authorizing legislation. The criteria set out by Congress in Section 2301(b)(3), would seem to be another example of the need for such agency direction for this new program. “The statute simply sets out the following criteria to be used by HUD in creating the funding rules for the Housing Act grants.”

  • First: Distribution of funds from HUD to States and Units of Local Government. Under Section 2301, the funding is to be distributed to States and Units of Local Government “with the greatest need [as determined by HUD] based on:

(a) The number and percentage of home foreclosures in each State or unit of general local government;

(b) The number and percentage of homes financed by a subprime mortgage related loan in each State or unit of general local government; and

(c) The number and percentage of homes in default or delinquency in each State or unit of general local government.” [Section 2301(b)(3)]

However, each state shall receive no less than .5 percent of funds allocated. [Section 2302]

  • Second: Distribution of funds by States and Units of Local Government. State or local governments that receive funds “shall give priority emphasis and consideration to those metropolitan areas, metropolitan cities, urban areas, rural areas, low-and moderate income areas and other areas with the greatest need, including those

(a) With the greatest percentage of home foreclosure;

(b) With the highest percentage of homes financed by a subprime mortgage related loan; and

(c) Identified by the State or unit of general local government as likely to face a significant rise in the rate of home foreclosures.” [Section 2301(c)(2)]

  • Third: Distribution to the homeowner.

Eligible Uses: “Amounts made available under this section may be used to

(a) Establish financing mechanisms for the purchase and re-development of foreclosed upon homes and properties;

(b) Purchase and rehabilitate abandoned and foreclosed homes;

(c) Establish land banks for homes that have been foreclosed upon;

(d) Demolish blighted structures and

(e) Redevelop demolished or vacant properties.” [Section 2301(c)(3)]

Purchases to be Below Current Market Value: “Any purchase of a foreclosed upon home or residential property shall be a discount from the current market appraised value, taking into account its current condition[.]” [Section 2301(d)(1)]

Reinvestment of Profits: The Housing Act provides a five-year reinvestment period for “any revenue generated from the sale, rental, redevelopment, rehabilitation, or any other eligible use that is in excess of the cost to acquire and redevelop (including reasonable development fees) or rehabilitate an abandoned or foreclosed upon home or residential property[.]” [Section 2301(d)(3)] After the expiration of this period, such profits are to be deposited into the U.S. Treasury as “miscellaneous receipts.”

Authority to Specify Alternative Requirements: HUD has the authority to specify alternative requirements under Title I of the Housing and Community Development Act of 1974 in its administration of these program funds, subject to certain specified exceptions (e.g., fair housing, nondiscrimination, labor standards the environment). If selected, HUD must report alternative requirements to congressional oversight committees.

Low and Moderate Income Requirements: Two income-based requirements under the Housing Act:

(a) Funds shall only go to “individuals and families whose income does not exceed 120 percent of area median income;” and - 2 - Client Alert 08-128

(b) “not less than 25 percent of the funds appropriated…shall be used for purchase and redevelopment of abandoned or foreclosed upon homes or residential properties that will be used to house individuals or families whose incomes do not exceed 50 percent of area median income[.]” [Section 2301(f)(3)]

No Matching Grant Required. “No matching funds shall be required for a state or unit of general local government to receive funds.” [Section 2301(e)(2)]

Stakeholders Should Be Active

Certainly, local governments, as well as any institution involved in holding or financing real estate, should have an interest in the HUD-developed funding formula and allocations. Further, the manner of providing grant funding to states and to local governments is of interest, as well as whether third-party agreements might be reached by which, for example, homes that are real-estate owned, or are in various stages of foreclosure, might be purchased together. Many such issues are raised by this legislation.