Community Development Block Grants: Legislative Proposals to Assist Communities Affected by Home Foreclosures

Community Development Block Grants:
Legislative Proposals to Assist Communities
Affected by Home Foreclosures
Eugene Boyd and Oscar R. Gonzales
Analysts in Federalism and Economic Development Policy
Government and Finance Division
Summary
In response to the rising number of home mortgage foreclosures Congress passed
the Housing and Economic Recovery Act of 2008, P.L. 110-289, formerly H.R. 3221
(the Act). Title III — Emergency Assistance for the Redevelopment of Abandoned and
Foreclosed Homes — of the Act, which was signed by the President on July 30, 2008,
will provide additional federal financial assistance to state and local governments with
high concentrations of foreclosed homes, subprime mortgage loans, and delinquent
home mortgages.
Many economists contend that increased numbers of foreclosures could contribute
to neighborhood destabilization, trigger housing price depreciation, and result in
declining state and local revenues and subsequent service cutbacks. Although Congress
did include provisions in the Act that reform the mortgage financing industry, this report
will focus on legislative provisions of the Act that will allocate block grant assistance
to state and local governments to aid them in acquiring, rehabilitating, and reselling the
growing supply of foreclosed and abandoned housing. Title III of the Act uses the
framework of the Community Development Block Grant (CDBG) program to channel
an additional $4 billion in assistance to state and local governments. It should be noted
that Title III of the Act overcame a veto threat by the President Bush who contended
that the assistance would result in the rescue of lenders and speculators. The bill also
drew criticism from fiscal conservatives who argued for cuts in other programs to offset
the $4 billion appropriation. This report will be updated as events warrant.
Introduction
The increasing number of mortgage foreclosures poses a financial threat to local
housing markets, financial institutions, homeowners, and state and local governments.
The impact of the foreclosure crisis on financial institutions and homeowners has been
well documented, and has been the focus of congressional debate in the formulation of

policy options. The impact on state, local governments, as well as neighborhoods, also
has garnered the attention of federal policy makers.
According to a report by the U.S. Conference of Mayors, it is projected that in 2008,
mortgage foreclosures:
^!may displace 1.4 million households from their homes;
^!could result in $1.2 trillion in lost property values; and
^!could potentially result in the loss of more than $1.4 trillion in projected
real estate tax revenues — important sources of financing local
government operations.¹
Given the prospect of declining revenues, falling property values, and blighted
neighborhoods with significant numbers of vacant houses, some local officials have
sought relief through judicial actions.² In addition, various state and local officials have
called for federal intervention.
Congressional Action
In response, several bills, including H.R. 3221,³ were introduced during the 110^th
Congress that would address specific issues, including:
^!reducing the number of homeowners facing foreclosure because of their
inability to keep pace with rising interest rates as their adjustable rate
mortgages, many of them on subprime loans, reset;
^!reclaiming the supply of vacant housing by providing assistance to states,
local governments, and nonprofit entities that may use funds to acquire,
resell, rehabilitate, rent, or demolish vacant properties in an effort to
minimize potential blight and associated problems in neighborhoods with
high concentrations of foreclosed properties; and

¹ United States Conference of Mayors. The Mortgage Crisis: Economic and Fiscal Implications
for Metro Areas. U.S. Metro Economies. November 2007. Global Insight.
² For instance, the cities of Cleveland and Baltimore have filed suits against commercial and
investment banks. Cleveland’s suit against 21 commercial and investment banks, some of them
involved in securitizing mortgage loans, contends that the banks violated state law by creating
a public nuisance when providing mortgages to homeowners who could not afford them. This
allegedly resulted in a significant number of foreclosures, creating blighted conditions and
reducing property values and tax collections. Baltimore’s suit against Wells Fargo, which was
filed in U.S. District Court of Maryland, Baltimore Division, contends that the bank
discriminated against black homebuyers by selling subprime, high interest loans to them at a
higher rate than white homebuyers. See City of Cleveland v. Deutsche Bank, Court of Common
Pleas, Cuyahoga County, Ohio, available at [http://www.city.cleveland.oh.us/pdf/
whats_new/ForeclosureDocument1-11-08.pdf], and Mayor and City Council of Baltimore v.
Wells Fargo, U.S. District Court of Maryland, Baltimore Division, Case No. LO8CV 062,
available at [http://www.relmanlaw.com/ City%20of%20Baltimore%20v.%20Wells%20Fargo%

20-%2008-cv-62%20-%20Complaint.pdf].

³ Other measures include S. 2455, S. 2636, and H.R. 5818. H.R. 3221 incorporated much of
the language of S. 2636.

^!addressing declining tax revenues, particularly property taxes and the
subsequent cutbacks or curtailment in the delivery of public services.
Foreclosure Prevention Act, H.R. 3221, Title III (P.L. 110-289). The Senate⁴
version of the bill, which was introduced by Senator Dodd in the nature of a substitute,
initially passed the Senate on April 10, 2008. Subsequently, in an effort to expedite
consideration and passage of the measure, the House and Senate engaged in an
amendment exchange, rather than establishing a conference committee. Despite initial
objections raised by the White House, including the threat of a presidential veto, the
measure passed the House on July 23, 2008. Subsequently, the Senate approved the
measure on July 26, 2008. Despite his objections to the provisions of Title III and his
strong support for other provisions of the Act, the President signed H.R. 3221 into law as
P.L. 110-289 on July 30, 2008.
Title III — Emergency Assistance for the Redevelopment of Abandoned and
Foreclosed Homes — of the Act as signed by the President, appropriates $4 billion in
supplemental assistance to states and local governments, as defined under the CDBG
program, based on a separate formula to be developed by HUD. The Act directs HUD to
establish an allocation formula that distributes funds to states and local governments with
the greatest need as measured by:
^!the number and percentage of foreclosed homes in each state or locality;
^!the number and percentage of subprime mortgages in each state or
locality; and
^!the number and percentage of homes in default or delinquency in each
state or locality.
The measure gives HUD 60 days after enactment to establish a formula for allocating
funds to eligible states and local governments, and an additional 30 days to distribute
funds to states and local governments.
Formula or Allocation Elements. Each state and local government that receives
funds will be required to allocate funds within 18 months of receipt and to give priority
consideration to areas and metropolitan cities with:
^!the greatest percentage of home foreclosures;
^!the highest percentage of subprime loans; and
^!the greatest likelihood of facing a significant rise in the number of home
foreclosures.
Although the legislation identifies specific factors to be used by HUD to develop a
formula, it does not specify an actual formula other than requiring a minimum allocation
for each state of 0.5%. If for illustrative purposes it is assumed that HUD assigned equal
weights to the three factors, then a formula to allocate funds under the Act would
resemble the following.
[(SF/FN) + (SSL/SLN) + (SD/DN)] ÷ 3 x $4,000,000,000 = state allocation

⁴ The House version of H.R. 3221 does not include CDBG funds to buy foreclosed property.

^!SF = number of foreclosures in a state.
^!FN = number of foreclosures nationwide .
^!SSL = number of subprime loans in a state.
^!SLN = number of subprime loans nationwide.
^!SD= number of delinquencies in a state.
^!DN= number of delinquencies nationwide.
Under this scenario foreclosures, subprime loans and delinquencies in a state as a share
of the nationwide total would be weighed by one third and multiplied by the $4 billion
available in funding.
Eligible Activities. State and local governments could use funds to:
^!create financing instruments that would enable them to finance the
purchase and redevelopment of foreclosed homes and residential
properties;
^! purchase and rehabilitate foreclosed homes and residential properties for
sale, rent, or redevelopment;
^!establish land banks for foreclosed homes; and
^!demolish blighted structures.
Restrictions, Limitations, and Prohibitions. The Act limits the purchase
price of a home or residential property acquired by a state or local government to an
amount less than the home’s current appraised market value. The discounted value
should be significant enough to ensure that when the home is sold by the state or local
government the purchaser (homebuyer) will pay below market value for the home or
property. Further, when a foreclosed home or property is to be purchased as a primary
residence by an eligible homebuyer, the act would limit the price for which a state and
local government may resell such property to no more than the cost the state or local
government paid to acquire and redevelop or rehabilitate the property.
During the first five years following its enactment, the Act requires a community or
state to reinvest all profits in additional sales, rentals, redevelopment, and rehabilitation
of foreclosed homes and properties. After the five-year period, all profits may be
deposited in the U.S. Treasury unless HUD approves a request to allow a community or
state to continue to use funds to finance activities eligible for assistance under the Act.
Other provisions of the bill would subject funds and revenues generated by activities
under this Act to the same requirements as funds appropriated under the regular CDBG
program. However, for the sole purpose of expediting the use of funds under the Act,
HUD may issue alternative requirements to those governing the regular CDBG
appropriations, except for requirements related to fair housing, nondiscrimination, labor
standards, and environmental review. In addition, the legislation:
^!prohibits funds from being used in economic development projects
involving the use of eminent domain;
^!limits the income of individuals and families who may benefit from
assistance provided by the act to those whose incomes do not exceed

120% of the area’s median income;

^!requires a state and local government to certify that at least 25% of the
amount allocated by the bill will be used to purchase and redevelop

CRS-5
housing for individuals and families whose incomes do not exceed 50%
of the area’s median income; and
^!requires that each state receives a minimum allocation of 0.5% of the
amount appropriated.
Analysis
Weighing Foreclosures, Subprime Loans and Delinquencies. Although
P.L. 110-289 directs HUD to take into account high concentrations of foreclosed homes,
subprime loans, and mortgage delinquencies/defaults when developing an allocation
formula, it provides HUD broad discretion over how these factors are to be weighted.
Different weighting would result in differing allocation patterns.
Table 1 presents data from the Mortgage Bankers Association (MBA) showing the
distribution of foreclosures, subprime loans, and defaults, differs among the states. In
some cases — for example Georgia and Indiana — states have the same number of
foreclosures: 31,000. However, Georgia has nearly twice as many subprime loans
(209,000) than Indiana (124,000). In addition, Georgia has almost one-third as many
homes in default (67,128) than Indiana (49,069).
Therefore, if absolute numbers of foreclosures, subprime loans, and defaults were
used to rank states, then Georgia and Indiana would receive the same amount of funding
for foreclosures, but different amounts for subprime loans and mortgage defaults. On the
other hand, if states are ranked based on the percent of the total, both Indiana and Georgia
represent 3.3% of total foreclosures in the nation. However, Georgia represents 3.6% of
subprime loans and 4.0% of homes in default while Indiana represents 2.1% of subprime
loans and 2.9% of mortgage defaults.
Table 1. Ranking of States by Relative Share of Foreclosures,
Subprime Loans, and Mortgage Defaults as of 12/31/2007
^For^e^c^l^os^ur^e^s^Subpr^im^e^L^o^aⁿ^s^D^e^f^a^u^lts
^S^h^{are o}^f^S^h^{are o}^f^S^h^{are o}^f
^Sta^t^e^N^um^be^r^tota^l^R^aⁿ^k^N^um^be^r^tota^l^R^aⁿ^k^N^um^be^r^tota^l^R^aⁿ^k
^C^a^lif^or^nia^132,830^14.2%¹^768,629^13.1%¹^228,133^13.7%¹
^Flor^ida^115,457^12.3%²^573,562^9.8%²^186,093^11.2%²
^O^h^io^60,070^6.4%³^221,457^3.8%⁵^91,188^5.5%⁴
^Mic^h^ig^aⁿ^51,914^5.5%⁴^212,296^3.6%⁷^91,081^5.5%⁵
^I^llinois^43,499^4.6%⁵^215,⁴⁷⁷^3.7%⁶^69,251^4.2%⁶
^T^e^x^a^s^42,821^4.6%⁶^408,399^7.0%³^99,495^6.0%³
^N^e^w^Y^o^r^k^39,403^4.2%⁷^280,767^4.8%⁴^61,978^3.7%⁸
^G^e^or^gⁱ^a^31,111^3.3%⁸^209,008^3.6%⁸^67,126^4.0%⁷
^I^ndiaⁿ^a^31,098^3.3%⁹^124,399^2.1%¹⁵^49,069^2.9%¹⁰
^P^e^nns^y^l^v^a^nia^27,749^3.0%¹⁰^206,662^3.5%⁹^52,069^3.1%⁹
^N^e^w^J^e^r^s^e^y^24,432^2.6%¹¹^137,337^2.3%¹³^40,074^2.4%¹¹
^A^r^iz^ona^22,060^2.4%¹²^187,029^3.2%¹⁰^38,048^2.3%¹²
^Minne^s^o^ta^20,536^2.2%¹³^90,171^1.5%²¹^31,359^1.9%¹⁵

CRS-6
^For^e^c^l^os^ur^e^s^Subpr^im^e^L^o^aⁿ^s^D^e^f^a^u^lts
^S^h^{are o}^f^S^h^{are o}^f^S^h^{are o}^f
^Sta^t^e^N^um^be^r^tota^l^R^aⁿ^k^N^um^be^r^tota^l^R^aⁿ^k^N^um^be^r^tota^l^R^aⁿ^k
^C^o^lor^a^do^19,349^2.1%¹⁴^117,102^2.0%¹⁷^32,040^1.9%¹⁴
^N^e^v^a^da^17,350^1.8%¹⁵^101,528^1.7%²⁰^28,783^1.7%¹⁸
^N^o^r^t^{h C}^a^r^o^lina^17,116^1.8%¹⁶^145,611^2.5%¹¹^37,062^2.2%¹³
^Ma^s^s^a^c^hus^e^tts^16,394^1.7%¹⁷^88,813^1.5%²²^26,787^1.6%²¹
^Vir^g^inia^14,402^1.5%¹⁸^137,368^2.3%¹²^30,372^1.8%¹⁷
^Wⁱ^s^c^onsⁱⁿ^13,950^1.5%¹⁹^61,773^1.1%²⁷^21,049^1.3%²⁴
^Ma^r^y^la^nd^13,204^1.4%²⁰^125,653^2.1%¹⁴^27,491^1.7%¹⁹
^Mis^s^ourⁱ^12,873^1.4%²¹^107,850^1.8%¹⁹^27,366^1.6%²⁰
^{South C}^a^r^o^lina^12,361^1.3%²²^76,229^1.3%²³^21,797^1.3%²³
^T^e^nne^s^s^e^e^12,355^1.3%²³^120,406^2.1%¹⁶^31,020^1.9%¹⁶
^K^e^ntuc^k^y^10,362^1.1%²⁴^51,⁹⁶⁹^0.9%³⁰^17,241^1.0%²⁶
^L^ouisⁱ^aⁿ^a⁹^,739^1.0%²⁵^65,343^1.1%²⁴^19,621^1.2%²⁵
^O^k^la^hom^a⁸^,906^0.9%²⁶^51,743^0.9%³¹^14,727^0.9%²⁸
^W^a^s^h^ing^t^on^8,727^0.9%²⁷^114,124^2.0%¹⁸^16,847^1.0%²⁷
^C^onne^c^tic^ut^8,459^0.9%²⁸^62,626^1.1%²⁶^13,808^0.8%²⁹
^A^l^a^b^a^m^a⁸^,391^0.9%²⁹^60,273^1.0%²⁸^23,013^1.4%²²
^I^o^w^a^7,165^0.8%³⁰^28,230^0.5%³⁵^10,800^0.6%³¹
^Mis^sⁱ^s^sⁱ^ppi^5,473^0.6%³¹^38,467^0.7%³²^13,502^0.8%³⁰
^K^a^ns^a^s^5,182^0.6%³²^32,563^0.6%³³^9,682^0.6%³²
^O^r^e^g^on^4,679^0.5%³³^64,764^1.1%²⁵^8,578^0.5%³³
^A^r^k^a^ns^a^s^3,618^0.4%³⁴^29,172^0.5%³⁴^8,452^0.5%³⁴
^U^t^a^h^3,557^0.4%³⁵^52,987^0.9%²⁹^7,025^0.4%³⁵
^R^hode^I^s^la^nd^3,417^0.4%³⁶^19,227^0.3%⁴⁰^5,530^0.3%³⁷
^Ma^ine³^,414^0.4%³⁷^18,563^0.3%⁴¹^5,064^0.3%⁴⁰
^D^e^la^w^a^r^e^3,307^0.4%³⁸^17,628^0.3%⁴³^5,274^0.3%³⁹
^N^e^br^a^s^k^a^3,154^0.3%³⁹^18,291^0.3%⁴²^5,504^0.3%³⁸
^N^e^w^H^a^m^p^s^h^ir^e²^,892^0.3%⁴⁰^22,669^0.4%³⁸^6,599^0.4%³⁶
^N^e^w^Me^xⁱ^c^o^2,688^0.3%⁴¹^24,585^0.4%³⁷^4,959^0.3%⁴¹
^I^d^a^h^o²^,412^0.3%⁴²^25,035^0.4%³⁶^4,288^0.3%⁴²
^H^a^w^aⁱⁱ^1,944^0.2%⁴³^19,572^0.3%³⁹^3,204^0.2%⁴⁴
^W^e^s^t^Vir^g^inia^1,827^0.2%⁴⁴^16,242^0.3%⁴⁴^4,002^0.2%⁴³
^Montaⁿ^a¹^,038^0.1%⁴⁵^8,³⁹²^0.1%⁴⁷^2,117^0.1%⁴⁵
^{South D}^a^k^o^ta⁹⁷⁵^0.1%⁴⁶^4,800^0.1%⁴⁹^1,564^0.1%⁴⁷
^{District o}^f
^C^o^lum^b^ia⁹⁵⁰^0.1%⁴⁷^8,793^0.2%⁴⁶^1,966^0.1%⁴⁶
^Ve^r^m^ont⁹⁰⁷^0.1%⁴⁸^4,745^0.1%⁵⁰^1,344^0.1%⁴⁸
^A^l^a^s^k^a⁶²⁹^0.1%⁴⁹^10,319^0.2%⁴⁵^1,135^0.1%⁴⁹
^W^y^om^ing⁵⁸⁸^0.1%⁵⁰^6,016^0.1%⁴⁸⁹⁶⁴^0.1%⁵⁰
^N^o^r^t^{h D}^a^k^o^ta⁵¹⁴^0.1%⁵¹^2,996^0.1%⁵¹⁸⁹¹^0.1%⁵¹
^O^t^he^r^30,905^3.3%^251,352^58,330
^U^.^S.^938,152^100.0%^5,849,012^1,664,760
^S^o^u^rce:^C^R^S^,^b^a^s^e^d^oⁿ^M^B^{A d}^a^t^a^a^v^aⁱ^l^a^b^l^e^a^t^[^h^t^t^p^:^/^/^www.^hope^now^.c^om^/s^ite^_tools^/^da^ta^.htm^l]^.