The federal Neighborhood Stabilization Program is on a course that will see it added to the list of unsuccessful government housing initiatives, according to a recent report from the Department of Housing and Urban Development (HUD).

The Neighborhood Stabilization Program was put into place one year ago, and allocated $4 billion to approximately 300 local governments to be used to purchase and redevelop abandoned and foreclosed properties. However, HUD reports that less than half of the allocated funds have been used so far. The failure to use the federal funds is attributed to strict government regulations on their use and an inability among local governments to compete with flippers and investors (and homebuyers) in purchasing homes that have been through foreclosure. When the Stabilization Program expires in September, many of the funds will remain unspent.

first tuesday take: The Neighborhood Stabilization Program has failed thus far, and will continue to do so because it deserves to fail. It is no surprise that the federal dollars granted by the program have been unable to spur spending by local governments. This money comes with restrictions, including a requirement that it can only be used to purchase property at a price of up to 1% less than the property’s appraised value; a value which is based, at best, on the past month’s sales prices, and at worst remains unadjusted for any trend in pricing declines.

Instead of allowing local governments to stabilize housing costs, this program puts them into direct competition with predatory short-term flippers (and long-term income-property investors), without equipping them to beat the flippers at their game. Local governments are thus encouraged to artificially raise the price of properties—by bidding against speculators—without first allowing those properties to be available to the ones who will do the most to help the community as a whole: homebuyers who intend to use the homes as their principal residences.

If local governments want to rehabilitate blighted property and enforce the standards of cleanliness and maintenance required to uphold neighborhood property values, they have a simpler and more direct solution available to them. Local governments can simply fix up the property and perform yard maintenance themselves by enforcing residential ordinances, and add the costs of repair and maintenance to the property’s tax bill for payment by the current or future owner. The property’s value is maintained at neighborhood standards by the city, the owner is encouraged to sell and the local government takes no loss. [For more on the Neighborhood Stabilization Program, see first tuesday’s March 2009 article, the American Recovery and Reinvestment Act.]

Re: “Deadline Looms to Use Federal Foreclosure Money” from The San Diego Union Tribune