Foreclosure Crisis Response with the Neighborhood Stabilization Program

Foreclosure Crisis Response with the Neighborhood Stabilization Program

Congress created the Neighborhood Stabilization Program (NSP) in 2008 to counteract the negative consequences of the foreclosure crisis brought about by the housing market collapse. Administered by HUD and funded at $6.9 billion, NSP was implemented in three phases between 2008 and 2010. The second round of the program, NSP2, differed from the first round in that it instituted a competitive grant process and expanded eligibility for grants to nonprofit organizations in addition to state and local governments. In addition, NSP2 required grantees to determine target areas for concentrating funds based on HUD foreclosure distress risk scores. Eligible activities included financing, acquisition and rehabilitation, land banking, demolition, and redevelopment. In total, NSP2 directed $1.93 billion to 56 grantees in 133 counties and 29 states, covering 3,068 census tracts.

The overall goals of NSP were to slow the decline in home prices caused by foreclosures and reverse the negative spillover effects on surrounding neighborhoods. Researchers call this negative spillover a “contagion effect,” after the potential of foreclosures to spread throughout the neighborhood. Although research indicates that prices decline for properties surrounding a foreclosure, no consensus exists on the broader effects of foreclosures on other housing outcomes, such as vacancies, sales volume, financial distress, and whether homes are owner- or renter-occupied. Researchers are still debating the answers to some basic questions: How nearby does a foreclosure have to be for a negative effect to appear? How many foreclosed properties on a block are necessary to trigger a contagion effect? NSP2 provided an important opportunity to explore how concentrated investments can stabilize neighborhoods with high foreclosure rates.

Evaluation of the Neighborhood Stabilization Program

In February 2011, HUD commissioned research to evaluate the effects of NSP2. The resulting analysis covers NSP2’s three-year implementation, ending in February 2013, when all grant funds had to be spent. The study was to document how NSP2 grantees structured their programs, including how funds were invested in eligible activities, and to assess whether neighborhoods receiving NSP2 resources experienced positive benefits, such as rising home prices compared with census tracts not receiving NSP2 resources. In addition, the study investigated crime rates in financially distressed neighborhoods receiving NSP2 funding, and noted whether foreclosed properties showed signs of distress identifiable from the street.

Although the evaluation reports on all 56 grantees, the study focuses on 19 counties and 28 lead grantees based in various housing markets with significant levels of NSP activity. The research team used several quantitative and qualitative methods to investigate the program’s impact on the 6,354 properties receiving funding in the sample counties, including analysis of transaction records for millions of property foreclosures and sales in neighborhoods with and without NSP2 investments, interviews from two rounds of site visits with program grantees and partner organizations, and a Visual Tracking Survey of the exterior conditions of financially distressed and non-distressed properties that was performed three times over the course of a year. Due to limited resources, researchers conducted the Visual Tracking Survey only in Cuyahoga County, Ohio, and Palm Beach County, Florida.

Findings

Grantees varied in how they designed and implemented NSP2 across housing markets. Although this finding is not surprising given the considerable latitude that grantees had in designing their programs, these differing approaches to combating the foreclosure crisis were also influenced by local geography and economic performance in both the market boom of the 2000s and the recession later in the decade. Among the grantees in the study sample, acquisition and rehabilitation was the most common activity, accounting for 50 percent of all expenditures across the 19 counties. This activity was used most in Boom-Bust Sand States and Slow Growth markets, where it accounted for 50 percent and 85 percent of total program activity, respectively. Demolition, on the other hand, made up only 2 percent of total spending across the sample study, but was disproportionately focused on properties in the Lagging/Declining markets such as Cuyahoga County, Ohio (Cleveland) and Wayne County, Michigan (Detroit). In these markets, 77 percent of properties with NSP2 investments were demolished.

The grantees’ approach to implementation also evolved over the course of the program as they adapted their initial strategies to changing circumstances. Grantees shifted their focus from acquiring single-family properties to acquiring multifamily properties, as well as reallocating funds from acquisition and rehabilitation activity to redevelopment. Researchers point out that these modifications were likely caused by the program’s tight spending deadlines, as well as by increased competition from investors for foreclosed properties. Despite the scale of activities, researchers found little evidence that NSP2 investments created positive spillover effects in neighborhoods.

• NSP2 did not systematically improve housing market outcomes for properties and census tracts where the program operated, relative to similarly distressed neighborhoods that did not receive NSP2 investments. While there is evidence that neighborhoods with program activities in Los Angeles County, California and Maricopa County, Arizona did see housing prices rise for properties near foreclosures, there was no sign of a consistent, positive spillover effect on housing outcomes across all counties. Moreover, some neighborhoods with intensive amounts of NSP2 funding, such as Philadelphia, experienced lower prices and higher vacancy rates than did other neighborhoods receiving less NSP2 funding. Researchers believe this finding of modest effectiveness is likely because the scale of the intervention was too small to successfully combat the housing crisis. The average census tract in the study, for example, contained 58 properties in financial distress and a total of 1,715 housing units — but only 7 properties actually received NSP2 funding. The study also concludes that, despite the program’s insistence on concentration, activities never achieved a sufficient level of concentration; the average distance between NSP2 properties in a typical census tract was 0.5 miles. The study does confirm previous research in finding that home prices declined for properties within 500 feet of a foreclosure sale.

• In three cities, researchers analyzed the relationship between foreclosure and crime rates within distance rings of 250 and 433 feet surrounding a foreclosed property. The researchers found that NSP2 did not lead to a significant reduction of property or violent crime rates in Chicago or Denver, but there is evidence that the program contributed to a meaningful decrease in property and violent crime in Cleveland. Researchers found that demolition and land banking were responsible for the decrease in property crime in Cleveland, whereas rehabilitation and redevelopment led to a decrease in violent crime. One possible explanation for the positive results in Cleveland is that grantees explicitly chose neighborhoods for targeted investments based on crime rates.

• The Visual Tracking Survey in Cuyahoga County, Ohio and Palm Beach County, Florida revealed that properties in financial distress present more signs of damage, disrepair, and blight than do properties not in that condition. These counties differed in important ways, however. In Cuyahoga County, the degree of visual blight was comparable on blocks with both high and low levels of foreclosure, whereas in Palm Beach County, observation of visual blight was higher on blocks with more financially distressed properties. Site teams also observed an overall reduction in the amount of visual blight in Palm Beach County between March 2012 and March 2013, but detected little decline in Cuyahoga County. Researchers credit this difference to the Florida county entering economic recovery.

Implications
Although NSP2 had a smaller overall impact on housing market outcomes in foreclosure-affected neighborhoods than many had hoped, it is important to consider that areas targeted for intervention were already significantly distressed before the program was implemented. In addition, the study design presents some limitations. The analysis period, which coincided with the program’s end date of February 2013, may have been too short to make conclusive determinations about NSP2’s long-term effects. Only 4,612 of the 6,354 properties rehabilitated with NSP2 funds were completed at the end of the observation period, meaning that there may be a lag between when program investments are complete (that is, when the properties are fully rehabilitated) and when market outcomes are observed. Despite this inconclusiveness, the study finds that NSP2 activities have the potential to spur future neighborhood revitalization, as grantees viewed program funding as a complement to their long-term strategies. Further research should examine conditions and outcomes in a smaller subset of census tracts for lessons and effective combinations of activities to pursue in those neighborhoods.