Mounting anxiety over a sweeping shift in federal homelessness policy collided with courtroom urgency as twenty states and the District of Columbia challenged a new rule that would cap permanent housing under the Continuum of Care program at 30 percent, a ceiling that critics said risked unraveling placements built over years. The lawsuit framed a stark choice between a proven, low-barrier path into stable homes and a reoriented portfolio that tilts toward transitional beds and treatment. Central to the dispute were claims that HUD overstepped its authority, grafting ideological tests onto grants and upending a funding model in which roughly 90 percent historically backed permanent housing under Housing First. Supporters of the change argued outcomes should drive dollars. Opponents countered the cap would push people back outside, creating churn, higher costs, and avoidable harm.
The Policy Shift: From Housing First to a 30% Cap
HUD’s overhaul pivoted CoC funding away from the long-dominant Housing First model and toward transitional housing, treatment, and employment-focused services, with leaders insisting the previous strategy locked communities into permanent placements without solving underlying issues. The agency cast the change as a reset: redirect dollars to programs that demand sobriety or clinical engagement, track measurable progress, and reduce what officials derided as a “homeless industrial complex.” By imposing a 30 percent cap on permanent housing, the rule aimed to rebalance portfolios that historically placed rapid rehousing and permanent supportive housing at the center of local systems.
Plaintiffs argued the cap was both blunt and harmful, contending it would dismantle the primary tool that keeps people indoors and safe while stabilizing income, health, and family ties. They warned that politicized eligibility conditions—most explosively, the alleged ability to deny funds to organizations that acknowledge transgender and nonbinary clients—would distort local provider standards and undermine civil rights. Community leaders cautioned that the shift ignored on-the-ground evidence: permanent housing placements reduce unsheltered homelessness quickly and, when paired with voluntary services, curb costly cycles through shelters, emergency rooms, and jails. The new approach, they said, risked trading stability for churn.
The Lawsuit and Legal Theories
Filed in the U.S. District Court for the District of Rhode Island, the case asked Judge Mary S. McElroy to halt the cap and rollbacks on the grounds that HUD violated the Administrative Procedure Act and encroached on Congress’s spending power. The states argued the agency lacked authority to attach novel conditions to a program where Congress directed funds based on need and performance within statutory parameters. They also challenged the accelerated implementation timeline, saying it would destabilize systems calibrated to decades of guidance that prioritized permanent housing interventions as the backbone of CoC strategy.
Past rulings added intrigue without predetermining the outcome. Though appointed by President Trump after an earlier Obama nomination, Judge McElroy had blocked prior Trump-era funding freezes, signaling that abrupt restructurings face real scrutiny regardless of party. The plaintiffs leaned on that posture, asserting HUD’s record failed to justify capping permanent placements that communities regarded as the most effective response to unsheltered homelessness. By reframing “success” around treatment compliance and transitional metrics, they said, the agency shifted the goalposts without accounting for statutory design or the real-world reliance interests of tenants, landlords, and local providers.
HUD’s Defense and Claimed Safeguards
HUD defended the FY2025 reforms as overdue and results-driven, warning that litigation would stall nearly $4 billion in aid while perpetuating what it called an imbalanced status quo. Officials argued that permanent housing had crowded out transitional and treatment-forward programs that can address substance use and mental health needs earlier, smoothing the path to lasting stability. The agency emphasized new accountability tools, asserting that scoring and funding rules would reward measurable outcomes and reduce programs that warehouse clients without demonstrable gains. Safeguards for children, veterans, and seniors were highlighted to reassure stakeholders.
In the agency’s telling, diversification was not retreat but refinement: expand options, broaden the continuum, and hold providers to clearer benchmarks. HUD said critics overstated the risks, noting localities could still fund permanent housing within the cap while expanding pathways that were neglected under Housing First. Supporters within the administration pointed to pilot data showing improved engagement when transitional beds coupled treatment with structured services. Opponents remained unconvinced, responding that transitional slots often fail to convert to permanent tenancies at scale and that strict conditions can deter participation by those with complex needs.
Impacts, Politics, and What Comes Next
Internal HUD estimates suggested as many as 170,000 people could lose permanent housing assistance under the cap, a projection that stoked fears of rising street homelessness and strain on overstretched shelters and hospitals. Providers described a scramble: leases, service contracts, and staffing plans were locked to permanent models, and reclassification within tight timelines risked service lapses. Politically, the map widened. Democratic-led states from Arizona to Washington joined the suit, while on Capitol Hill an unusual convergence emerged as 22 House Republicans backed a one-year extension for projects expiring in 2026, echoing a broad advocacy campaign for continuity.
A practical path had already taken shape and rested on near-term triage and a sober accounting of evidence. Bridge renewals for 2026 projects, emergency waivers to prevent lease terminations, and explicit nondiscrimination guardrails would have stabilized placements while the court weighed the Spending Clause and APA claims. If the cap were enjoined, agencies could have prioritized maintaining existing tenancies and funded evaluations comparing permanent, transitional, and treatment-first models using standardized outcomes. Even if HUD’s rule stood, communities could have sequenced transitions with tenant protections, phased scoring changes, and preserved core Housing First capacity to avoid avoidable displacement.
