One of Western North Carolina’s leading providers of housing counseling may see its federal HUD funding cut, on technical grounds.

On October 15, 2008 the US Department of Housing & Urban Development (HUD) declined the 2008-09 grant application from OnTrack Financial Education & Counseling.  Based out of Asheville, On Track had been hoping for a $135,000 grant.  This grant would have gone to provide services for foreclosure prevention counseling, reverse mortgage counseling for elderly homeowners, and homebuyer education for WNC.

OnTrack has been a HUD approved housing counseling agency since 1979.  OnTrack points out that technical difficulties caused OnTrack’s application to not successfully upload to HUD’s grant website on the July 9th deadline. For over four months, they have worked to make amends.  Their application was denied, nonetheless.

This is frustrating.  Foreclosures are a problem undermining our economy.  Counseling works to ameliorate bad situations and prevent new problems before they arise in the first place.  Counseling is cost-efficient.

The North Carolina Division of Community Assistance held a meeting yesterday in Greensboro to help cities, counties, and non-profits with their NSP applications.  The NSP is a federal program, administered through HUD, that enjoins these groups to fight the foreclosure crisis in their communities.  HUD has allocated $3.92 billion.  Approximately $57 million will go to North Carolina, including $12 million for non-profits.

What is emerging is that in North Carolina, the NSP will be designed in such a way that only a narrow set of strategies can qualify.

The criteria are especially daunting for non-profits.  There will be no land banking, for example.  This is one of the ideas supported by one of North Carolina’s largest non-profit housing developers and credit unions, Self-Help.

[polldaddy poll=1062393]  Moreover, all funds must be recaptured.  What does that mean?  Well, if DCA grants a county $200,000 to do infill redevelopment of blighted property, the following scenario would emerge:  The county might partner with a non-profit on redevelopment.  Say the property was made into a multifamily rental and resold for $225,000.  The non-profit would be able to take its costs of management out, but it would have to return what was left of the $225,000 after those costs.

Last, non-profits have to meet more stringent tests for population served.  The HUD regs are written to require that at least half of all residents served by any grant are at incomes at or below 50 percent of area median income.  That is a tough test, all by itself.  It pretty much guarantees that most projects are going to be for rental housing.

Non-profits in North Carolina will have to go one more step.  100 percent of residents in non-profit projects must have incomes at or below 50 percent of AMI.

Last, although anyone is eligible, it looks like only twelve counties are “competitive.”  All twelve are east of Winston-Salem.  Folks from Buncombe County were not happy when they heard about that at yesterday’s meeting.

It seems likely that the NSP in North Carolina is going to be have requirements that make it most amenable for supportive housing.

Although a lot of pundits and critics (Neil Cavuto, Charles Krauthammer) have attempted to blame the housing finance crisis on the Community Reinvestment Act, reality keeps getting in the way.

These numbers show the servicing companies that have born the most losses on subprime loans.  With a few exceptions, most of these firms are not regulated by CRA.  Moreover, most are players that came to the mortgage loan market well after the CRA Act was written.  Some, like AIG or Bear Stearns, came in to the game well afterwards.

• Countrywide Financial
• HSBC
• JP Morgan Chase
• Wells Fargo Home Mortgage
• American Home Mortgage (Wilbur Ross)
• Ocwen
• Litton (Goldman Sachs)
• Home Loan Services
• HomeEq Mortgage (Barclays)
• Washington Mutual
• ResCap (General Motors)
• Saxon (Morgan Stanley)
• Citi
• American General Finance (AIG)
• EMC Mortgage (Bear Stearns and Chase)

source: Inside Mortgage Finance

What this tells me is that these companies made the decision to seek out risky loans, not because they were made to by CRA, but because they were tempted by the promising of fat returns.  They are Wall Street firms, not bank-holding companies.  These are the smartest guys in the room.  For their poor decision, they are being punished.

And swiftly.  If only we weren’t all suffering for their excesses.

I hate to be harping on something, but I can’t help but notice a theme in the government reaction to the fiscal crisis.  We have seen the Federal Reserve act quickly and authoritatively when it comes to addressing a problem on Wall Street.  We have already witnessed a $700 billion stimulus package.  We had an emergency equity injection.  Not so far back, the government backed up JPM’s acquisition of Bear Stearns. Now there is talk that another stimulus is needed.

All of this is in relief to the limited efforts that have taken place to help homeowners.  The centerpiece of our foreclosure policy is the Neighborhood Stabilization Program.  That provides about $4 billion for communities – just a drop in the bucket compared to the Wall Street outreach.

[polldaddy poll=1025729]My thought is not that leaders are wrong for addressing challenges on Wall Street.  Rather, they seem to be applying a much higher barrier to the concerns for regular families.

The situation is getting worse.  Homes that a few months ago were merely sporting delinquencies are now in foreclosure court.  A court in Chicago is having to increase the number of judges dedicated full-time to foreclosures.

What’s more, the cost of lending is not going down.  The TED spread remains high.  LIBOr is high.  The banks are not using their new equity to make more loans.  They are hoarding their funds for a rainy day.

And, there are no provisions to make sure that this equity injection is not just a subsidy for shareholders.  I like that taking the funds has an impact on CEO pay, but that is more an exercise in political symbolism than in impactful policy.  It is worth asking if these banks should be allowed to take equity and still pay out dividends.  Some of the dividend payouts are now exceeding earnings.  Are tax payer funds being used just to protect payouts that need to be reduced?

A lot of people are trying to find a solution for our financial crisis.  It might be several crises by now, actually, as we are seeing problems in derivatives, in insurance, and bond markets, as well as in mortgages.

It is hard to go forward fixing the problem if we cannot figure out how we got to where we are, though.  I like this housing research paper on the roots of the problem on mortgages in the United States.  The main culprits:

• excess housing supply
• buyers were allow to purchase homes with no equity, or negative equity
• easy lending standards
• lack of regulatory safeguards

This is not a surprise to a lot of people.  The warnings bells, well, they were rung.  Its just a matter of listening.

Oddly, these very problems all existed, for better or worse, in the manufactured housing market at the end of the 90s.  There were too many homes available.  Buyers definitely had negative equity, especially if they got financing on furniture and other add-ons.  Lending was not very tough.  The point was to get people in homes and move on.  And, of course, there were hardly any regulatory safeguards at all.

What is odd is how much of a cautionary tale it appears to have been.  No one drew the lessons from the meltdown that took place in 01 and 02 in manufactured housing.  I guess, again, that people had begun to assume that stick built housing was a magic asset class (like Dutch tulips) that can never go down in value.  Well, it did.

The cautionary tale doesn’t portend much for the future of the US economy.  Manufactured housing shipments have never really recovered from the go-go days.  US homebuilders like Hovnavian and K-B Homes don’t want to witness that same trajectory on their future.  Credit is very tight, now.  About half of all applications for credit on manufactured housing are denied.