The state and federal governments are throwing a lot of "new money" at the housing market in hopes of stabilizing prices and bailing out subprime mortgage borrowers. For California alone, the total looks to be several hundred million dollars at least in the next year alone. But is that anywhere near enough to make a dent in the problem?
The federal housing bill was passed at the end of July, and it contains a brand new federal affordable housing program for local governments. Buried in the bill alongside the subprime mortgage bailout and the possible bailout of Fannie Mae and Freddie Mac is a $4 billion program that locals will administer starting this fall. Depending on how the money is allocated, this could mean a half-billion dollars for California.
The housing bill also contains a couple of other new funding sources for affordable housing. One is a permanent housing trust fund funded by contributions from Fannie Mae and Freddie Mac that could reach $300 million a year, which would presumably give California $30 million to $50 million more per year. A second is an increase in the low-income housing tax credits, which could add $7 million to the California pot this year.
And there's more. The feds authorized the issuance of an additional $11 billion in tax-exempt bonds this year funds to be used to help first-time homebuyers and to finance rental apartments and approximately $1.2 billion is likely to be earmarked for California. This funding allowed the California Housing Finance Agency to create a new program earmarking $400 million for first-time homebuyers buying foreclosed properties in areas where the subprime problem is especially bad.
On top of that, the Legislature in August passed a bill that would allow local redevelopment agencies to spend some of their money helping subprime mortgage holders (see CP&DR, July 2008
). And don't forget that the state Department of Housing and Community Development just doled out more than a half-billion dollars for housing projects and infrastructure in infill locations (see CP&DR Insight, August 2008
Even all of this funding may not be enough to turn the market around. But it could be enough to change the nature of certain neighborhoods especially in older cities as opposed to newer suburbs.
The federal Department of Housing & Urban Development will be shoveling the $4 billion out to local governments in California and elsewhere this fall, based on a yet-to-be-created formula focusing on the number of foreclosures and the number of subprime mortgages in each jurisdiction. Then the locals will have 18 months to spend the money. Considering that about one-fifth of the country's housing foreclosures are in California, local governments here should receive substantial allocations.
What can the locals do with all this dough? Pretty much anything that they can do with any other affordable housing funds, except they have to focus their efforts on properties that are abandoned or in foreclosure. This includes:
Buying and rehabilitating houses
Selling or renting houses
Banking the land
Demolishing blighted structures and redeveloping vacant properties.
Yes, it sounds a lot like redevelopment. And, in fact, there may be a match with the state redevelopment program because AB 2594, assuming Gov. Schwarzenegger signs it, gives redevelopment agencies the power (but not a mandate) to use their non-housing funds to help out subprime mortgage holders.
But it's not clear how much of a mesh there will be between traditional redevelopment practices and the neighborhoods where this money is likely to go. HUD's distribution formula is supposed to target the funds to areas where there are lots of foreclosures, lots of subprime loans, and lots of houses where payments are delinquent. Stereotypical subprime country includes the Central Valley and the Inland Empire (the Stockton-to-Merced corridor on Highway 99 appears to be the worst-hit subprime area in the nation.) In these areas, cities will probably focus on buying the houses and turning them around to new buyers
as quickly as possible. That, at least, appears to be the goal of local officials in those areas.
But there's another kind of subprime landscape in California. In older urban areas southern Los Angeles County, for example the subprime problem is just as bad. In these areas, the buyers are pretty much the same as in the Central Valley. They are not really creditworthy and they are unable to pay the increasing interest rates. But the houses and neighborhoods are different. Single-family houses they may be, but they are older homes located in tough neighborhoods. It could be hard to find qualified buyers willing to take these houses on although if the prices are low enough, the bottomless market of first-time Latino homebuyers in Los Angeles will probably help move along these properties.
In older cities, however, the new program raises another question: Will the funds be used mostly for rehab and sale write-downs, or will they be used for more classic redevelopment purposes, such as demolishing blighted buildings and buying or redeveloping the land? The program certainly permits the use of funds for classic redevelopment purposes. So it is possible these older cities may simply see the new federal program as another piggy-bank for redevelopment.
It is true that the cities may not use the money for commercial purposes. They have to use all the funds to benefit low- and moderate-income residents, including at least a quarter of the money for low-income residents. But will some cities use the money to buy up foreclosed single-family houses, declare them blighted, tear them down, and move on with higher-density projects? This clearly won't happen in Moreno Valley and Elk Grove. But it could happen in Compton and even in parts of Merced.
It's worth noting that not everybody in Washington thought throwing $4 billion at local governments was a good idea. President Bush apparently held his nose on this aspect of the bill when he signed it (at 7 o'clock on a Saturday morning with no members of Congress present). Bush's criticism was that the local money was simply a bailout for lenders, because the locals will wind up creating a price floor for the properties. Rep. Pete Sessions, a Republican from Dallas, said the new program will simply "allow local governments to expose themselves to the risks of the market."
But local governments will be entering the market with federal dough, not their own. Even a billion or more dollars may not be enough, given the massive size of the California housing market, and the massive size of California's subprime problem (1 million of the state's 20 million housing units at risk of foreclosure). Still, this is shaping up to be the biggest infusion of housing cash since the 1970s. We'll see if it works.