A federal judge has dealt the Trump administration another legal defeat in its yearlong push to overhaul how the government funds homeless housing, ruling Friday that a $1.3 billion set-aside meant to divert money away from permanent supportive housing was unlawful. New York Attorney General Letitia James announced the win on the social platform X, writing that her office and its coalition partners had stopped the administration's effort to jeopardize funding meant to fight homelessness.
“We won our lawsuit against the Trump administration and stopped their efforts to jeopardize funding to fight homelessness,” James wrote on X. “It's shameful that this administration tried repeatedly to break the law to push their political agenda and put this critical program at risk.” The U.S. District Court for the District of Rhode Island granted key parts of a summary judgment motion in favor of the state coalition, which James co-led with Washington Attorney General Nick Brown, according to the Washington State Office of the Attorney General.
A Billion-Dollar Diversion Blocked
U.S. District Judge Mary McElroy ruled that the Department of Housing and Urban Development's attempt to redirect $1.3 billion away from permanent housing and into new transitional housing projects violated federal administrative law, per the Washington attorney general's office. Analysis from the National Alliance to End Homelessness, cited by that same office, indicated the set-aside would have jeopardized permanent housing for at least 97,000 unhoused residents nationwide had it taken effect, with housing experts warning that pulling funds from existing contracts would force program closures and tenant evictions.
The ruling is the latest chapter in a fight that began in November 2025, when James led a coalition of 18 other state attorneys general and two governors in suing the administration over a revised HUD grant notice that imposed unexpected caps and policy conditions on Continuum of Care funds, according to the New York State Office of the Attorney General. That program, established under the McKinney-Vento Homeless Assistance Act of 1987, was designed by Congress to distribute federal grants to local governments, states, and nonprofits based strictly on community housing needs, the office notes.
From Housing First to a 30 Percent Cap
Before the 2025 policy changes, HUD historically allocated roughly 90 percent of its Continuum of Care funding to permanent supportive housing under the Housing First model, which places people directly into permanent housing without preconditions like sobriety or employment. The administration's proposed FY2025 rules sought to cap that permanent housing funding at just 30 percent, according to Courthouse News Service. Federal agency documents and housing advocate analyses estimated the restrictions endangered permanent housing for roughly 170,000 unhoused or formerly unhoused individuals nationwide, the outlet reported.
The challenged rules also introduced non-financial eligibility conditions, including provisions that denied funding to service providers acknowledging transgender or nonbinary individuals and penalized organizations in localities without strict anti-homelessness enforcement laws, according to the New Jersey Office of the Attorney General. State attorneys general argued in court that those mandates violated the Administrative Procedure Act and exceeded the authority Congress had granted HUD in the first place.
A Pattern of Judicial Pushback
Friday's decision is not the coalition's first courtroom victory. Judge McElroy issued a preliminary injunction in December 2025 ordering HUD to halt its grant alterations and process applications under the pre-existing rules, a move the California Department of Justice said was necessary because HUD's sudden notice replacement threatened severe funding gaps for local housing providers. Then, on June 30, McElroy issued a summary judgment ruling that HUD's initial FY2025 restrictions violated the Administrative Procedure Act, writing that the agency's rapid shift away from Housing First was the “hallmark of unreasoned decision making,” per Smart Cities Dive.
Each time a court blocked one version of the policy, HUD pivoted to a new approach — most recently the $1.3 billion set-aside that Friday's ruling struck down. The pattern reflects what the Washington attorney general's office describes as an agency wrestling repeatedly with the same legal defeat under a different name.
What It Means for New York Communities
The stakes are concrete for New York. Across the state, 24 regional Continuum of Care coalitions receive more than $320 million annually in federal HUD grants, with 94 percent of that money dedicated to permanent supportive housing that keeps 13,861 New York households stably housed, according to the New York attorney general's office. Had HUD's restrictions taken hold, that funding stream faced steep cuts.
The legal battle has also touched local Hoodline coverage areas beyond New York. Hoodline previously reported on how a federal court ruling preserved Santa Clara housing funding earlier this year, and on how Milwaukee's point-in-time homeless count reflected the same threatened rule changes to local Housing First models. Friday's ruling adds another data point to a legal fight that has now spanned the better part of a year, with state attorneys general prevailing in district court each time while HUD's shifting rules leave local nonprofits and Continuum of Care coalitions bracing for the next attempted change.
