Appeals Court Clears HUD to Resume $4 Billion Homelessness Funding Overhaul

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A federal appeals court has temporarily cleared the U.S. Department of Housing and Urban Development to move forward with its 2026 homelessness-funding overhaul while HUD appeals a lower-court ruling that had knocked the program off track.

The order from the U.S. Court of Appeals for the First Circuit stays an August ruling that vacated HUD’s fiscal 2026 Continuum of Care funding notice. The practical effect is significant: HUD can resume work on a $4.04 billion national grant competition that would redirect a substantial share of federal homelessness funding toward transitional housing and supportive-service projects.

The appellate action does not resolve the underlying lawsuit. It changes what HUD can do while the appeal proceeds.

That distinction matters because the litigation has already disrupted the annual funding calendar for thousands of local governments, housing providers and nonprofit organizations that rely on Continuum of Care grants.

A $1.3 billion shift is back in play

HUD issued the 2026 funding notice on June 1 with a markedly different approach to homelessness assistance. The department set aside $1.3 billion for new projects, prioritizing transitional housing and supportive-service-only programs. The full competition makes $4.04 billion available.

HUD has argued that the change would put more emphasis on treatment, recovery, employment and self-sufficiency. Secretary Scott Turner has sharply criticized the federal government’s previous reliance on the Housing First model, which generally prioritizes getting people into permanent housing without making treatment or sobriety a precondition.

Opponents see the funding shift very differently. A coalition of states, cities and homelessness organizations sued, arguing in part that the set-aside would divert money from permanent supportive housing and jeopardize existing programs and residents.

U.S. District Judge Mary McElroy sided with the challengers on a procedural issue in August. She concluded that HUD violated the Administrative Procedure Act when it issued the 2026 notice without the notice-and-comment process she found federal law required. The court vacated the funding notice in its entirety rather than permanently enjoining HUD from adopting the policy through a lawful process.

HUD appealed to the First Circuit in cases including State of Washington v. U.S. Department of Housing and Urban Development, No. 26-1922, and National Alliance to End Homelessness v. HUD, No. 26-1923.

The timing problem is becoming part of the story

Congress appropriated more than $4 billion for the program and directed HUD to make the awards no later than Dec. 1, 2026. The district court ruling had left the 2026 competition suspended, and HUD told applicants that it could not accept applications under the vacated notice.

The First Circuit’s stay changes that immediate posture, but it does not erase the uncertainty facing applicants. HUD still needs to tell communities how it will restart the competition, what deadlines will apply and whether other parts of the process will change after weeks of litigation.

The department had already begun laying legal groundwork for the policy after the August ruling. On Sept. 11, HUD published a Federal Register notice seeking public comment on its approach to transitional housing and supportive services, with comments due Oct. 13.

That notice argues that transitional housing can be particularly useful for groups including families with children, young people and survivors of domestic violence. HUD also says the national supply of transitional housing has fallen sharply since 2007 as federal policy shifted toward permanent housing.

Those are HUD’s policy conclusions, not settled findings in the litigation. The plaintiffs have challenged both the legality of the funding structure and the consequences of moving money away from permanent housing programs.

A continuing legal fight over federal homelessness policy

The dispute is part of a broader effort by the Trump administration to remake federal homelessness policy. HUD and the Department of Health and Human Services have promoted what they call a treatment-first approach, pairing housing assistance with behavioral-health services, addiction treatment and programs intended to increase self-sufficiency.

The administration’s approach has repeatedly drawn court challenges. The current 2026 case is separate from litigation over HUD’s 2025 Continuum of Care changes, which also reached the First Circuit earlier this year.

For housing providers, the immediate issue is less ideological than operational. Organizations that depend on federal grants need to know what programs can be renewed, what new projects can compete and when HUD will actually make awards.

Wednesday’s appellate order gives HUD room to restart its 2026 funding plan while the merits of the appeal are litigated. It does not guarantee that the $1.3 billion set-aside will ultimately survive judicial review, nor does it end the challengers’ claims.

The next consequential move may come from HUD rather than the courthouse. Applicants will now be watching for revised instructions and a new competition timetable as the Dec. 1 statutory award deadline approaches.