Dragged Down by Regs

For an "emergency" measure, NSP came so loaded with ever-shifting regulations and restrictions it was hard to get any money out the door. It's getting better, but more could be done.

A second crucial problem is that congressionally-imposed time constraints can set up perverse incentives. Congress required all NSP1 funds to be used within 18 months. While it certainly makes sense to require funds provided to address a crisis be used quickly, this limitation created a “rush to spend.”

It’s hard to know whether the constant exhortations by HUD to “spend, spend, spend” (which felt a little unseemly for a taxpayer-funded government program) resulted in the purchases of the most strategic properties in neighborhoods, with the least amount of public subsidy needed for project feasibility expended, and the maximum amount of private funding leveraged. In Massachusetts, we’ve tried to stick to our guns and keep our acquisitions focused and our subsidy contributions as low as possible, but the pressure to spend quickly may have trumped spending well in other places with less resolve.

Given that it took most HUD grantees several months to enter into contracts with their subgrantees (the people and organizations on the ground actually spending the money), this means that most of us had a year at most to implement our NSP1 programs. And with the many rules for the program evolving and changing over that year, the program is only now, at the end of NSP1, starting to be workable. I think of NSP1 as a start-up that will allow NSP2 and NSP3 to become effective in a more timely fashion. The three-year time frame for NSP2 is much more realistic.

Congressional spending mandates should be structured to ensure that they also provide an incentive to spend well. In the future, perhaps delegating power to a Congressional committee to grant extensions to HUD upon reasonable cause would be a better approach.

We’ve also learned that despite NSP’s specific goal of leveraging other investment, its many regulations mean that it’s not cost effective to use as a shallow subsidy. In Massachusetts, for example, we used NSP1 to broaden the eligibility of a successful, long-standing, low-income homeownership program to provide an incentive to prospective homebuyers to purchase foreclosed properties. The program has been extremely successful in leveraging private bank mortgage lending with small amounts of state funding used as interest subsidies for the buyers and loan loss reserves for the lenders in lieu of costly private mortgage insurance. Using NSP for these “financing mechanisms” seemed like a good idea.

But just as all the NSP rules and requirements combined to make this funding a less-than-ideal tool for responding quickly to the crisis, it also makes it nearly impossible to use as a shallow subsidy. Although I take great pride in our $16,000 per unit average expenditure for our NSP homeownership program (compared to much higher per unit costs for most NSP programs in our state), the brain damage caused by regulatory compliance, reporting, and audits results in costs that greatly outweigh the benefits of using small amounts of federal money to leverage private investment.

There are many other factors that have contributed to the challenge of acquiring foreclosed properties and stabilizing neighborhoods that NSP did not anticipate. Competing with bottom feeders with cash has certainly been an issue, though that will now be tempered somewhat by HUD’s First Look program, modeled on the National Community Stabilization Trust’s.

With HUD now earnestly trying to make NSP work more efficiently, the stress of NSP’s early days is abating, but more could be done. Congress gave HUD broad authority to “specify alternative requirements” to expedite the use of the funds, but HUD has made only minimal use of this power.

It may be a pipe dream, but future government programs — especially those addressing a crisis — should be designed with a basic regulatory framework to ensure the appropriate expenditure of public funds. They should identify a handful of essential requirements and make sure those are observed, and then let us get to the important work in our communities.

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Judy Jacobson is the deputy director and general counsel for the Massachusetts Housing Partnership.


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