The Wall Street Journal reports local jurisdictions are having a hard time figuring out how best to spend the $4B HUD is distributing to them to help stabilize neighborhoods experiencing high level of foreclosures. Here are my suggestions, based on my experience at the Los Angeles Housing Department helping rebuild neighborhoods devastated by the Northridge earthquake.
The Northridge quake left tens of thousands of homes and rental units vacant and damaged. Some neighborhoods were affected much more than others, but in every neighborhood there were owners whose housing was not damaged, so comprehensive redevelopment was not an option. There was a real possibility some of the neighborhoods would remain blighted indefinitely if dramatic steps weren’t taken. Many homes and apartment buildings were either foreclosed upon or required lender cooperation in the reconstruction. The quake occurred in January, 1994, a time in Los Angeles when many residents and apartment owners had lost all the equity in their units due to economic conditions even before the earthquake. The parallels between this situation and foreclosure blighted neighborhoods is obvious.
In an effort to preserve the damaged housing HUD provided the City of Los Angeles with $400M in CDBG and HOME funds. The Los Angeles Housing Department developed programs which were extremely successful, and two years later almost all the affected properties in the target areas were back on line. Here's a link to a study published in 2000 which summarized the reconstruction.
The most important decision made was to leverage rather than replace private sector funding sources. The mechanism to accomplish this was to offer subordinate loans at 0% interest payable over 30 years with no payments for the first five years. The amount of the loan was capped at $35,000 per unit, the loans were only available in target areas (described below), and became due when the property was sold. This approach had several benefits:
- The very favorable terms concentrated private sector reinvestment in the target areas
- The predictable loan amount allowed buyers and sellers to factor the financing into their negotiations
- The loan structure (as opposed to direct investment or a grant) created an annuity for the Housing Department; as the loans have been repaid the money is available for recycling into new programs.
- Between three and four times as many units were assisted as would have been possible if only public funds were involved.
Another key decision was making the funds available for rental housing. When the loan was made on a rental unit, an income restriction was placed on the unit which at that time was above market, so there was no impact on the rent charged or the value of the unit. However, as rents have increased in Los Angeles these units have become an important component of the affordable housing stock. A restriction limiting the unit to tenants making 60% or less of the area median income would not have an immediate impact in most low and moderate income foreclosure neighborhoods, and would help ensure housing affordability in the years to come.
Other key components of the programs were:
- A detailed inventory of the affected housing. An inventory is necessary both to select target areas and to monitor progress. This step is particularly important if there’s a possibility of getting more money if your programs are successful (which is probably going to be the case with the Neighborhood Stabilization Program). Information on foreclosures is readily available but constantly changing, so an active database (as opposed to a static snapshot) is necessary.
- A focus on the areas which are most seriously affected, while paying attention to political geography. The Los Angeles Housing Department designated 17 neighborhoods as “Ghost Towns”, which were characterized by high concentrations of damage. Although these areas were primarily determined by need, a secondary consideration was to identify at least one neighborhood in each city council district that would receive funds. This was an important step to ensure broad political support in Los Angeles’ often fractious local government. Again, the foreclosure data is readily available but needs to be analyzed and monitored.
- A multi-department effort. Although the Housing Department had primary responsibility for the effort, other departments played important roles. For example, the Department of Building and Safety, Public Works, and General Services played an important role in boarding up and securing vacant buildings, and the Los Angeles Police Department stepped up patrols to deal with disorder issues and squatters in the affected neighborhoods. Foreclosure-ravaged neighborhoods have similar needs.
Additional information on the programs is described in this report by the LA Housing Department. Compare this effort to the dismal housing reconstruction progress in New Orleans, where, for example, only 82 of an estimated 10,000 damaged rental homes have been brought back on line in the three years since the disaster.
The is an unfortunate tendency to want to treat each disaster as unique and to create new solutions, as opposed to adopting proven approaches which were created elsewhere. I hope this housing disaster will be different.
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