Lebron isn’t the only one playing games with Cleveland these days. HUD is, too.
Back in March, without offering any explanation, HUD stopped offering the city of Cleveland, as well as local non-profits, the first look on its foreclosed properties. When properties with FHA backed mortgages go into foreclosure, the FHA pays the lender the balance, and HUD takes ownership of the home, and sells it to help finance FHA’s operation. Since 2009, HUD had been selling Cleveland these foreclosed properties that were valued at less than $20,000 for as little as $100. Certainly not a net gain for HUD or FHA. But as an editorial in the Cleveland Plain Dealer points out, Fannie Mae has a similar program, with even more generous terms: they will sell any home valued at less than $25,000 for $1, and even chip in $3,500 for demolition costs.
Ohio lawmakers were outraged at the announcement, and made it clear to Secretary Shaun Donovan that they found this unacceptable. Both Dennis Kucinich and Sherrod Brown put pressure on Donovan, explaining why Cleveland needs this HUD program to keep their neighborhoods from dying. Should the city have to compete with private investors, at market prices, they could face years at the mercy of absentee landlords, and others who leave blighted properties as-is, waiting for the market to turn around. Even a Libertarian fanatic would have to admit that the latter practice is hardly an example of the supremacy of free markets; instead of allocating resources where they may best help a community, this does the precise opposite, even if it can lead to windfall profits, down the road.
Then, last Friday, right before the holiday weekend, HUD reversed its decision, sort of, and agreed to start giving the Cuyahoga County Land Reutilization Corporation — better known as the Cuyahoga County land bank — these “first look” deals, an agreement that had been shelved since last fall. So, instead of only being limited to the city of Cleveland, the deal would be countywide. And just like the previous deal with the city, the CCLRC can get homes valued at less than $20K for just $100. For houses between $20,001 and $100,000, they can buy them for a 30 percent discount, and houses that go to market without selling for a 60 day period will be offered to the land bank for half-price.
According to the story in the Plain Dealer, the CCLRC expects to demolish four out of every five properties they purchase from HUD. This is the quality of housing we are talking about here — the worst of the worst. And this is what makes HUD’s three month-long gap in providing this service to Cleveland so odd; Donovan’s department has been so forward-thinking, it seems like a strange lapse in judgment to start selling blighted homes to whoever (I reached out to HUD for comment on these decisions, but did not receive a response in time for publication).
Around the same time, HUD also drafted a bill called PETRA (Preservation, Enhancement, and Transformation of Rental Assistance), which would allow local public housing authorities to leverage private financing for capital improvements to their housing stock. These private funds would be in addition to the Capital Fund Program, the money that HUD doles out to housing authorities annually; just this year, Donovan allocated $2.3 billion to this fund.
One commentator, UC Berkeley linguist George Lakoff, claimed that PETRA was a back-door way for HUD to privatize all of their public housing. My initial take was that this is a paranoid, alarmist read of the legislation, which seems more like the logical follow-up to HOPE VI; in the 90’s HUD revamped public housing to more imitate private housing in its physical form, this decade perhaps they can restructure its financing along similar lines. This, of course, opens up the risk that housing authorities might default on the loans, forcing their private lenders to foreclose, and assume ownership of public housing. In this case, Lakoff would be correct.
And it was on these terms, reports Lakoff, that the House Financial Services Committee put the bill on hold. Lakoff pulls some interesting parts from the transcripts of the hearing, which make his read of the bill slightly more compelling. Rep. Maxine Waters points out some seemingly contradictory language in the section describing what might happen to the use restrictions on public housing that goes into foreclosure. Should the Secretary find the units are “not physically viable or financially sustainable”, the bill says that he can change the affordability requirement agreement. Meaning, should the housing project end up in the hands of the bank that financed the improvement loans, and the building was still in poor shape, HUD could lift the price cap on the units, making them market rate housing. Rep. Waters asked Donovan:
Why would a property not be physically viable? Isn’t it the point of TRA to allow public housing agencies access to private markets so they can rehabilitate their properties? Second, by financially unsustainable, I assume you mean that the debt on the property exceeds the net operating income needed to make the property run in the black. How would a property get to be in this position in the first place, also, if the property is in foreclosure, isn’t it by definition financially unsustainable?
It certainly is vague, contradictory language, but that doesn’t necessarily mean — as Lakoff suggests — that HUD was planning on mortgaging off every last housing project in the coming years. But even if we give them the benefit of the doubt, HUD almost created a potentially exploitable loophole for private interests to assume control over lots of public housing, just by trying to trim the fat on their budget in the coming years. Given the timing, one wonders if their mysterious cancellation of their Cleveland first look program had a similar impetus. Or maybe not, it’s hard to say.
Either way, the two taken side-by-side demonstrate the real danger of this newfound culture of thrift and austerity in Washington. As the Cleveland first look program shows, and as anyone who reads Paul Krugman have been arguing lately, now is not the time to stop spending; the results could be disastrous on a global scale, as Krugman points out, but also at a very local level, like on a nondescript city street in Cleveland. We can’t afford to start cutting back on this type of emergency spending just yet. On the other hand, the PETRA bill is more of a crystal ball for what might lie ahead, the potentially bizarre arrangements and compromises the federal and local governments will have to make down the road should they decide to try to balance the budget in a recession without raising taxes or ending either of our wars in the Middle East.