Las Vegas Sun

November 25, 2015

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$60 million to stabilize neighborhoods buys five homes

Neighborhood Stabilization Program

This house at 1380 Operetta Way was one of the first five houses purchased by the federal government under the Neighborhood Stabilization Program Friday, Nov. 6, 2009.  Launch slideshow »

The Sun recently found that the three local governments receiving most of the money sent to the valley to buy, fix and resell foreclosed houses had been able to close deals on only five houses to date even though the program is nearly halfway into its 18-month time frame.

The U.S. Housing and Urban Development Department-funded project is aimed putting brakes on the decline of neighborhoods, and the plan locally had been to buy hundreds of homes.

But officials in Clark County, Las Vegas and North Las Vegas, which have a total of $60.2 million in Neighborhood Stabilization Program dollars, said the biggest obstacles to moving faster have been ongoing changes in rules and, more recently, the volatility of real estate because of investors swooping in. The same issues have occurred nationwide, making the program a good one to learn from.

Start with the way it was put together, says Alan Mallach, a nonresident senior fellow at the Brookings Institution who specializes in housing. In late 2008 well-meaning members of Congress “wanting to do something about the way foreclosures were affecting neighborhoods” tacked a program for addressing the issue onto a larger bill.

“The language was written in a couple of hours, in the wee hours of the morning, by somebody who made assumptions about what was going on, and what could be done about it,” Mallach says.

That language includes verbs such as “foreclose” in the past tense, which HUD then interprets literally and narrowly. The agency creates regulations authorizing municipalities to spend the money on houses that have been foreclosed on, but not on houses that are in the process of foreclosure. So when the market begins to create large numbers of houses in short sales, before foreclosure, municipalities are left in the cold, unable to compete for them.

It’s an example of how government programs need to be more sophisticated to deal with what Mallach calls “the moving target” of markets such as real estate.

Similarly, they need to be more flexible, he adds. For example, when federal rules required municipalities to purchase properties at a discount, to prevent local governments from handing owners windfalls courtesy of taxpayers, they didn’t take into account the possibility of investors coming back into the picture. “The investor doesn’t care what the fair market value is,” Mallach says. “When you have such a turbulent market, it’s hard to tell what that means.”

But in the end, there’s an even larger lesson: “Maybe we approached this in the wrong way,” Mallach says. “Instead of intervening, it might’ve been better off if the federal government had come up with regulatory measures and then let the market sort itself out.”

The underlying problem, after all, is that waves of foreclosures leave vacant and neglected homes, plummeting property values, vandalism and more-serious crime.

So some cities and counties are passing ordinances that require lenders to maintain properties once they are foreclosed on. Clark County is considering an ordinance that would raise fines on property owners who neglect upkeep. Fannie Mae is considering letting owners stay in their houses as tenants after foreclosure until a new owner appears, and then allowing them 60 days to vacate, Mallach says.

In the end, such complex problems as the collapse of a real estate bubble and ensuing foreclosures require “sitting down and analyzing the problem and how to solve it,” rather than rushing in to throw money, even when the problems create emergencies, he says.

Mallach predicts most local governments will spend the money within the required 18 months, but maybe not in the most effective manner. And so at the end, unfortunately, “the underlying goal of stabilizing neighborhoods may be out of reach.”

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