Salem-area housing providers that keep thousands of people in permanent homes stand to lose federal funding under a new HUD policy that Oregon Attorney General Dan Rayfield is challenging in court, arguing the change will force people out of their homes.

Rayfield and a coalition of 20 attorneys general and two governors filed a federal lawsuit on July 7, targeting a June 1 notice of funding opportunity from the U.S. Department of Housing and Urban Development.

The states argue the notice creates a $1.3 billion set-aside for transitional housing projects within HUD's $4.04 billion Continuum of Care program, effectively capping how much money can flow to permanent housing.

Without court intervention, CoC-funded permanent housing projects nationwide will lose funding or see it reduced, the coalition argues in its complaint.

The July 7 filing is distinct from a case Rayfield's coalition already won. On June 30, U.S. District Judge Mary S. McElroy in Rhode Island struck down HUD's 2025 CoC policy changes as "arbitrary and capricious," but that ruling covered only fiscal year 2025 funding.

McElroy denied the states' request to extend the order to 2026 dollars, leaving the door open for a new challenge.

HUD stood behind its approach after the June 30 loss. Secretary Scott Turner said in a statement that the June 1 notice reflects a shift toward funding projects "based on merit and outcomes" rather than permanent housing placement.

The new lawsuit argues HUD's June 1 notice violates the Administrative Procedure Act by skipping required notice-and-comment rulemaking. The states are asking the court to declare the funding conditions illegal and block HUD from enforcing them.

Local agencies have not commented publicly on the July 7 filing. But their concerns about HUD's direction were clear months earlier.

The Mid-Willamette Valley Community Action Agency, which serves Marion and Polk counties, receives about $2.1 million in CoC funding for housing services.

Its director, Jimmy Jones, said in November 2025 that providers face a wrenching choice: "For a lot of providers, they're going to be asked to do things that are kind of outside our DNA — things that we don't believe in, things that undermine human dignity."

The Salem Housing Authority manages 729 units and has built three CoC-funded permanent supportive housing projects: Redwood Crossings (37 units), Yaquina Hall (52 units), and Sequoia Crossings (60 units).

Marion County Commissioner Danielle Bethell said in November 2025 that conflicting federal and state requirements leave local agencies unable to comply with both.

The National Alliance to End Homelessness estimated in late 2025 that HUD's CoC changes could displace more than 2,500 Oregonians living in permanent supportive housing or rapid rehousing programs.

Oregon's homelessness crisis has grown sharper. A January 2025 statewide count found more than 27,200 people homeless on a single night, an 18.9% jump from 2024.

The state also cut its housing agency budget by more than $1 billion for the 2025-2027 biennium due to falling revenue forecasts, with eviction prevention programs losing about 75% of their prior funding.

Marion County is among the counties covered by Gov. Tina Kotek's extended homelessness emergency order.

No court hearing date has been scheduled for the new lawsuit.