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Obama administration warns cuts would hurt housing, Sandy relief

File photo of U.S. Housing and Urban Development Secretary Shaun Donovan announcing February 9, 2012 in Washington that the federal governme
File photo of U.S. Housing and Urban Development Secretary Shaun Donovan announcing February 9, 2012 in Washington that the federal governme

WASHINGTON (Reuters) - The Obama administration on Thursday warned that deep government spending cuts set to go into effect next month would have harsh consequences for housing programs and could threaten Superstorm Sandy recovery efforts in the U.S. Northeast.

Housing and Urban Development Secretary Shaun Donovan urged lawmakers to agree on a plan to stave off the $85 billion in automatic across-the-board cuts, known as "sequestration," set to begin on March 1.

"Sequestration is a blunt and indiscriminate instrument that was passed to help ensure that action is taken on a balanced deficit reduction package," Donovan told the Senate Appropriations Committee. "The ripple effects are enormous because of how central housing is to our economy."

In cataloging the impact of the cuts, which would total $1.2 trillion over nine years, Donovan said they would lead to a five percent reduction to Sandy recovery funding, or approximately $800 million. That money has gone towards repairs for more than 10,000 homes and small businesses in disaster areas across the U.S. Northeast.

Millions of people were left without employment and homes in the aftermath of the late-October storm, which caused flooding, wide-spread power outages and deaths. Donovan has been appointed by the White House to lead federal rebuilding efforts.

"This will not only prolong the suffering in a region that has been hit again this past weekend by a new storm," Donovan said. "It will also cost jobs that would be created by full expenditure of the approved funding and slow the full recovery."

Another vulnerable program that falls under HUD's umbrella is the financially strapped Federal Housing Administration. The agency is facing a projected $16.3 billion shortfall in its insurance fund, drawing concerns it may need taxpayer aid.

"Sequestration would jeopardize FHA's ability to process loans," Donovan said. That risks destabilizing the mortgage market and slowing the broader economic recovery, he said.

The government mortgage insurer backs 15 percent of all U.S. loans used for home purchases and is a source of funding for first-time buyers and modest-income borrowers.

Sequestration would also cut $212 million from HUD's HOME and Community Development Block Grant programs, Donovan said, adding that communities receiving the funds could lose nearly half a billion dollars in private funding because they would no longer be able to leverage federal dollars.

More than 100,000 homeless and formerly homeless people, including veterans, would be removed from their current housing or emergency shelter programs, as a result of the cuts, he said.

Foreclosure prevention and other types of housing, purchase or rental counseling would reach 75,000 fewer households, he said.

Sequestration would also directly affect HUD employees. The housing department's more than 9,000 staff members in 80 field offices "furloughs or other personnel actions," Donovan said.

(Reporting by Margaret Chadbourn; Editing by Jackie Frank)

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