By: Robert Selna
April 26, 2010
Cities hoping to tap into a 2-year-old federal program designed to rehabilitate distressed neighborhoods have found themselves muscled out of the real estate market by investors who pay cash, take troubled properties off a bank's books without bureaucratic hurdles and return them to the market as rentals.
In response, the U.S. Department of Housing and Urban Development said this month it will broaden the pool of foreclosures that municipalities can buy to help them purchase and resell homes at affordable rates.
Meanwhile, banks are issuing new guidelines to real estate agents, requiring them to give priority to local governments using federal funds to buy bank-owned homes. Some banks essentially have told agents not to consider offers from investors until everyone else has had a shot.
Local authorities charged with fighting blight and facilitating affordable homeownership are still working through the HUD changes and say they are not certain they will help.
Many are concerned because they have spent only part of the federal money they were allocated and will lose the rest if it is not used by the September deadline.
"We think there will be a larger pool of property than we have had access to, but there are still a lot of unknowns," said Michele Byrd, Oakland's deputy director of Housing and Community Development.
The most significant changes allow local authorities to buy properties in which distressed owners are 60 days delinquent on their mortgage or 90 days past due on their taxes.
Previously, the HUD money could be spent on property only when the foreclosure process was complete and a lender had taken back the property.
Byrd said the new rules seem to place cities in the role of facilitating short sales - in which a bank agrees to let a house be sold for less than what is owed on the mortgage. That would be a new undertaking for municipalities and the nonprofits they work with on housing issues, she said.
"It's hard to know how it would work with the homeowner," Byrd said. "If the house is vacant, it's much easier; if it's occupied, we'll need to determine whether the owners can stay."
Byrd said that out of $8.2 million that HUD allocated to Oakland in the Neighborhood Stabilization Program, about $2 million has been pegged for renovating rental units and $5 million has been earmarked for rehabbing and reselling homes at affordable prices.
So far, five houses in that city have been purchased, but not yet resold. Byrd said that once the homes are sold, the money will be rolled over to purchase more property.
HUD spokesman Brian Sullivan said the recent program changes were made after the agency heard complaints about investors winning out on foreclosure sales.
"In all fairness, the market is a dynamic place," Sullivan said. "You create rules and then you see how they play out in the implementation process. You've got to adjust to meet the market conditions."
One onerous rule imposed on local governments has been modified, but not to the satisfaction of some officials. It says they can use Neighborhood Stabilization money only if they buy properties at prices below their appraised value.
Currently a city's HUD-backed portfolio of properties must be bought at 1 percent below its appraised value. Previously the rule was 15 percent below the appraised value of each property purchased.
The requirement has made it hard for local agencies to prevail over investors willing to pay market price. Some local officials say the 1 percent rule continues to place them at a disadvantage.
"We're competing with all-cash offers, and if we're required to buy at a discount, that is a big hurdle," said Kara Douglas, Contra Costa County's affordable housing program manager.
Sullivan said the rationale for the rule is that it ensures homes will remain affordable when resold.
"Money will need to be spent to rehab them, so it certainly would not work if they were bought above the market price," Sullivan said.
As municipalities continue to sort through the program changes, banks say they are trying to do their part by giving cities and counties a leg up.
Some real estate agents say they don't mind banks urging them to give priority to local governments.
Most agree that the pattern of investors buying homes and renting them out is better than houses sitting vacant. But, they say, homeownership plays an important role in a community's vitality.
"I think the banks are doing things to try to improve their image and to create better environments in the neighborhoods," said Glen Bell, an East Bay Realtor with Keller Williams. "Rentals aren't bad, but you don't have the same pride of ownership."
"If the house is vacant, it's much easier; if it's occupied, we'll need to determine whether the owners can stay."
Michele Byrd, Oakland deputy director of Housing and Community Development