Construction on a new riverfront housing development in Detroit. Rebecca Cook/Reuters

A federal audit of an anti-blight program finds broad potential for fraud and abuse. But the program is still worthwhile and necessary.

In cities across the U.S., foreclosure loomed as an existential threat in the wake of the Great Recession. In some cities, the threat was already a reality. In Baltimore, Cleveland, Detroit, and other cities, properties abandoned by their owners unmoored neighborhoods and undermined housing markets. Even as the economy began its recovery, blight continued to escalate as a crisis in cities reeling from collapse.

The Hardest Hit Fund is one of the federal government’s main tools for stabilizing neighborhoods in decline. Since the program’s launch in 2010, the U.S. Department of the Treasury has disbursed $9.6 billion to housing markets in 18 states and the District of Columbia to try to prevent conditions from worsening. Part of the Troubled Asset Relief Program, the Hardest Hit Fund announced its fifth and final disbursement, an allocation of $1 billion, back in April.

State governments have used Hardest Hit Funs to support troubled neighborhoods by helping homeowners with little or no means keep their mortgages. In 2013, Treasury began allowing the truly hardest-hit states, namely Michigan and Ohio, to use Hardest Hit Funds for demolitions—putting $622 million toward a Blight Elimination Program.

So by 2013, seven state agencies were pulling funds from TARP to fight blight by demolishing abandoned properties. Did it work? The answer may be: Yes, but there’s room for improvement, and maybe not as much room for improvement as federal auditors would have you believe.

Former U.S. Treasury Secretary Timothy Geithner testifies in 2010 before the Congressional Oversight Panel created to oversee the expenditure of the Troubled Asset Relief Program. (Jonathan Ernst/Reuters)

The Hardest Hit Fund Blight Elimination Program is not the only federal blight game in town. The U.S. Department of Housing and Urban Development also provided some $300 million (at the time the TARP blight funds were established) for eliminating blight through its Neighborhood Stabilization Program. When compared with the HUD blight program, the Treasury blight program appeared to have some deep flaws, according to a new federal audit.

The Treasury program “is significantly [more] vulnerable to the substantial risks of unfair competitive practices and overcharging than HUD’s program,” reads the audit by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released late last week. “These risks could lead to fraud, waste, and abuse.”

The audit focuses on “necessary and reasonable” costs for demolition. Unlike HUD’s blight program, Treasury’s blight program does not include enough hard requirements and guarantees that states put the funds toward necessary and reasonable costs. The audit raises the troubling specter that hundreds of millions of dollars were misspent, or could still be misspent, in communities that need those funds most.

The SIGTARP audit notes that Treasury changed the target of the Hardest Hit Fund from homeowners to contractors. For the latter category, the Treasury program depends on state agencies to guarantee against the potential for abuse, according to auditors. The report reads:

Treasury’s repurposing of HHF opened the door to significant Federal TARP payments being made to an entirely different set of recipients than the struggling homeowners who the program was originally intended to benefit. TARP funds originally earmarked for homeowners now flow to demolition and other contractors and subcontractors engaged by intermediary local partners responsible for carrying out program activities. These program activities include pre-and post-demolition activities such as asbestos surveys, asbestos remediation, geo-engineering surveys, environmental studies, removal of trash and debris, grading of land, greening of land, and maintenance.

This is the major thread of criticism in the audit: Treasury repurposed the funds but didn’t recommit oversight for the funds. As opposed to the homeowners who received direct support from TARP’s main-path Hardest Hit Fund, the great majority of local partners (87 percent) in the Blight Elimination Program were individual contractors, for-profit companies, non-profit entities, land banks, subcontractors, and other agents—not homeowners, and not public agencies representing homeowners.

“The vulnerability of the Hardest Hit Fund to fraud, waste, and abuse significantly increased with blight elimination, which Treasury could have mitigated, but did not,” the audit reads.

That sounds damning. But there were not no safeguards at work in Treasury’s Blight Elimination Program. The SIGTARP audit recognizes that one of the main circuit breakers designed to prevent homeowners from taking more foreclosure bailout dollars than were obligated to them also prevented contractors and other demolition agents from taking more for demolishing properties than they should. That TARP oversight carried over, even after the targets for some of the funds changed in 2013.

While the SIGTARP report acknowledges this safeguard, the audit seems to suggest that it is categorically invalid. Treasury should have never directed TARP funds toward anyone who wasn’t a homeowner, because the oversight simply wasn’t there:

In what appears to be a holdover from previous versions of Treasury’s agreements with state agencies that limit Federal dollars for assistance (unemployment or other assistance) to a maximum allowable cost per homeowner, Treasury has set a maximum allowable cost per property for blight elimination activities. While this may have been sufficient to protect taxpayers against risks when the HHF recipients were those that Treasury intended HHF to help—homeowners—these terms are not sufficient to protect taxpayers adequately when the recipients of Federal dollars are not homeowners. Treasury did not intend to use HHF to bail out the recipients of Federal dollars for blight elimination activities.

[ . . . ]

Treasury’s maximum allowable cost per property (of $25,000 or $35,000) is not sufficient to protect against overpaying, waste, and fraud, because it does not reflect necessary and reasonable costs, but instead far exceeds the average cost of demolition to account for a worst-case scenario.

The SIGTARP audit indicates that the median cost of demolition for the Hardest Hit Fund was approximately $13,300 for Michigan, $24,400 for Indiana, and less than $9,000 for Ohio. Strictly by the numbers, there appears to exist the potential for fraud and abuse in Treasury’s Blight Elimination Program, whose ceilings run over the median costs.

As the report indicates, that higher ceiling for potential demolition payouts accounts for “worst-case scenario” demolitions. But some of the demolitions subsidized by the Hardest Hit Fund are worst-case scenarios—“hot houses” that require the removal of a lot of asbestos. Moreover, the market determines the cost for demolitions: Rowhouses, for example, are more expensive to demolish than detached single-family homes. Costs for acquisition and greening post-demolition (which I have included in the median costs per state listed above) vary wildly.

Costs may rise in the future as demolition processes improve. There aren’t enough inspectors in Michigan, for example, to monitor asbestos abatement in demolition projects currently underway. As the Detroit Free Press reported in April, the current state-based asbestos monitoring regime is simply not sufficient to deter the worst offenders from exposing workers to asbestos (a crisis for a separate report). There is a great deal of room for demolition practices to improve—and when they do, the costs for demolition may go up.

Focusing strictly on procurements for demolitions neglects some of the benefits to the kinds of spending that SIGTARP might deem not “reasonable or necessary.” For example, HUD provides communities that receive its Neighborhood Stabilization and Community Development Block Grants with technical assistance that helps them to plan for the full suite of services needed to alleviate blight and stabilize communities. HUD’s technical assistance “ensures that communities hopefully get it right the first time around,” Dekonti Mends-Cole, director of policy for the Center for Community Progress, tells CityLab.

“The Hardest Hit Fund has been enormously important for addressing distressed inventory in communities that really haven’t seen resources address blighted properties at this scale,” Mends-Cole says. “It’s definitely necessary. It’s a real commitment to adjusting these properties.”

Previous reports from SIGTARP suggest that federal auditors disagree that HUD and Treasury blight programs should be compared—except in terms of cost oversight. “HHF is not a grant program. It is an investment made by taxpayers, nationwide,” reads a SIGTARP report from April 2015. “Treasury, not each state, has an interest in leveraging the resources of all 19 jurisdictions with Treasury resources to provide further relief to states unable to help homeowners on their own.”

And again, from the June 2016 audit: “Every TARP dollar wasted in demolishing one property is one less dollar available to fund impactful demolition of other abandoned ‘zombie’ homes in that city.”

Of course, plenty of SIGTARP’s recommendations make sense. It seems perfectly reasonable to suggest that Treasury should insist on sealed bids and competitive proposals for blight elimination. And Treasury should require that recipients of Hardest Hit Funds be women and minority-owned businesses wherever possible. There are common-sense ways in which the demolitions-procurement process can be improved, as well as ways that states could be encouraged or even required to adopt best practices.

There may or may not be enormous costs savings to be found in better demolitions procurements, though. But there is a substantial benefit to be gain by continuing to invest TARP dollars on demolition activity. According to a two-year, pre-recession survey by the Land Policy Institute at Michigan State University, $3.5 million in demolition expenditures on demolition in Genesee County, Michigan (where Flint is located) resulted in a $112 million hike in property values. Those are figures that Treasury can take to the bank.

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