Will Cuts To HUD Budget Impact FHA Insurance Program?

Posted by Patrick Barnard on March 20, 2017 No Comments

The Trump administration’s preliminary 2018 budget, which seeks a cut of 13.2%, or about $6.2 billion for the U.S. Department of Housing and Urban Development (HUD), has left many wondering whether the Federal Housing Administration’s (FHA) insurance program will be affected.

The proposed cuts are part of the administration’s plan to reduce discretionary spending in order to increase defense spending and fund the southern border wall project. The proposed budget also aims to reduce a projected $9.4 trillion U.S. deficit over the next decade.

Although the budget is still a work in progress, a report from the Office of Management and Budget released late last week offers insight as to which HUD programs would get the axe under the current proposal.

For example, the Community Development Block Grant program, a HUD program that provides funding for parks and bike paths, etc., would see a cut of about $3 billion, according to the report.

“The federal government has spent over $150 billion on this block grant since its inception in 1974, but the program is not well-targeted to the poorest populations and has not demonstrated results,” the report states. “The budget devolves community and economic development activities to the state and local level and redirects federal resources to other activities.”

Interestingly, the biggest beneficiaries of the Community Development Block Grant program are the counties surrounding Washington, D.C.

The budget proposal, if approved as is, would also cut about $1.1 billion from three HUD programs designed to help improve struggling neighborhoods – the HOME Investment Partnerships program, the Choice Neighborhoods program and the Self-help Homeownership Opportunity program.

According to HUD, the HOME Investment Partnerships program “provides formula grants to states and localities that communities use – often in partnership with local nonprofit groups – to fund a wide range of activities, including building, buying, and/or rehabilitating affordable housing for rent or homeownership or providing direct rental assistance to low-income people. It is the largest federal block grant to state and local governments designed exclusively to create affordable housing for low-income households.”

The Choice Neighborhoods program, HUD says on its website, “supports locally driven strategies to address struggling neighborhoods with distressed public or HUD-assisted housing through a comprehensive approach to neighborhood transformation. Local leaders, residents and stakeholders, such as public housing authorities, cities, schools, police, business owners, nonprofits and private developers, come together to create and implement a plan that transforms distressed HUD housing and addresses the challenges in the surrounding neighborhood. The program is designed to catalyze critical improvements in neighborhood assets, including vacant property, housing, services and schools.”

Meanwhile, the Self-Help Homeownership Opportunity Program “awards grant funds to eligible national and regional nonprofit organizations and consortia to purchase home sites and develop or improve the infrastructure needed to set the stage for sweat equity and volunteer-based homeownership programs for low-income persons and families. [These] funds must be used for eligible expenses to develop decent, safe and sanitary non-luxury housing for low-income persons and families who otherwise would not become homeowners. Home buyers must be willing to contribute significant amounts of their own sweat equity toward the construction or rehabilitation of their homes.”

“State and local governments are better positioned to serve their communities based on local needs and priorities,” the Office of Management and Budget report says of these cuts.

The proposed budget would also cut about $35 million from Section 4 Capacity Building for Community Development and Affordable Housing, a grant program that provides funding “to national intermediaries to develop the capacity and ability of community development corporations and community housing development organizations to carry out community development and affordable housing activities that benefit low-income families.”

“This program is duplicative of efforts funded by philanthropy and other more flexible private-sector investments,” the Office of Management and Budget report states.

However, the report says even with the proposed cuts, HUD will continue to support homeownership through provisions of FHA mortgage insurance programs.

Two weeks ago, after the news was leaked that the president was considering a $6 billion cut to HUD, newly appointed HUD Secretary Ben Carson attempted to calm fears among his staff by sending out an email stating, “Starting [budget] numbers are rarely final numbers.”

“Please understand that budget negotiations currently under way are very similar to those that have occurred in previous years,” Carson wrote in the email to staff. “This budget process is a lengthy, back-and-forth process that will continue.

“It’s unfortunate that preliminary numbers were published, but rest assured, we are working hard to support those programs that help so many Americans, focus on our core mission, and ensure that every tax dollar is spent wisely and effectively,” Carson added.

Jereon Brown, deputy assistant secretary for HUD, issued a similar statement, saying, as per a Washington Post report, “This is a lengthy, back-and-forth process that will continue for at least the next two weeks. Normally, starting negotiation numbers are rarely final budget numbers.”

However, last week, HUD officials released a statement strongly indicating that the preliminary numbers were, in fact, the correct final proposed figures.

“Today, the administration proposed a fiscal-year 2018 spending blueprint for discretionary programs in several agencies across the federal government, including [HUD],” officials said. “The blueprint reflects the president’s commitment to support HUD’s critical functions that provide rental assistance to low-income and vulnerable households and to help work-eligible families achieve self-sufficiency. It also recognizes a greater role for state and local governments and the private sector to address community and economic development needs. Moreover, the spending plan supports the long-standing homeownership mission of the [FHA] to provide mortgage insurance to credit-qualified households. A more detailed program-by-program budget proposal will be announced in May.”

During a brief statement issued late Thursday, Carson said the budget furthers the Trump administration’s view of how HUD should operate.

“The discretionary budget plan released today by President Trump aligns with agency plans to provide rental assistance to low-income and vulnerable households and to help families achieve self-sufficiency,” Carson said, as per a report on BuilderOnline.com.

“The budget also promotes fiscal responsibility at HUD by promoting better efficiencies and leveraging IT modernization,” Carson continued. “I look forward to working with the president and remain keenly focused on HUD’s mission and core values.”

Some people in the mortgage industry already saw this coming: In an interview with MortgageOrb last week, Jeff Bode, president of Mid America Mortgage, said he had serious doubts that the proposed cuts would be reduced before the budget is finalized:

“My guess is that the proposed budget cuts will not be adjusted,” Bode said. “Housing has become so much more complex – and the mortgage industry needs the resources to ensure we do not revert to the same risky behavior that led to the mortgage crisis. I am not a big fan of the massive penalties that were levied on lenders in the past few years – and I would like to see enhanced technology to manage HUD. That won’t happen with this proposed budget.”

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