Most people living in metropolitan or suburban areas have seen homes in their neighborhood become foreclosures. Many of these homes are left by previous owners in a state of disrepair and soon the value of every home on the street is suffering. Multiply this scenario by the millions of foreclosures nationwide and it’s easy to see that one of the factors hindering recovery in the housing market is rampant foreclosure.

The federal government has put together a plan to fight this phenomenon, setting aside $3.9 billion in the Neighborhood Stabilization Program to acquire abandoned homes and make them look presentable again. The goal is to prepare the homes for resale and help the value of other homes in the area in the process. A year into the program though, less than 14% of the money set aside for the project has been used and if it’s not used during the next year, the money will be taken away. Here are some reasons that the money isn’t being spent.

- Private Investors Are Buying Foreclosures First: Real Estate investors and prospective home buyers realize that some of the best housing values in at least a decade aren’t going to last forever. Before the federal government can get these purchases arranged, many of the houses designed to benefit from this program are instead being purchased by private investors. Private buyers are good for property values too, but this is a big part of the reason this stimulus money is not being spent.

- Red Tape: Like any government program, this one has so many bells and whistles that getting everything in order and making a purchase is a lengthy process. One of the rules is that the home has to be purchased for at least 1% less than its appraised value. Many banks are selling foreclosures for more than their appraised value. In addition, before receiving any money from the federal government, state and local governments are required to submit a written plan describing in detail how they will use the funds. This requirement is making it difficult for some communities without the manpower or the expertise to put together a strategy to access even a nickel as a result of this program.

- Federal Money, But Little Federal Aid: Major metropolitan areas that have experience dealing with complicated housing issues are taking advantage of this program, but in many communities, there is simply not an organization responsible for dealing with rehabilitating foreclosures. The government recently put together a group of non profit organizations to help local governments access this money called the National Community Stabilization Trust. This group is working with financial institutions to make sure some foreclosed homes are offered to the government before being offered to private investors.

Whether or not this program works to stabilize home values in various regions around the country remains to be seen, but the next year will be critical for the housing market depending on the affect of foreclosures. Estimates predict that 4 million foreclosed home will need to be sold by the end of 2011.

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Tags: foreclosures, Neighborhood Stabilization Act, Real Estate

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