Can $15 billion and some paint save your 'hood?

NEW YORK (Money Magazine) -- Can a couple coats of paint, some spackle and $15 billion keep foreclosed homes from bringing down the home market?

A housing-rescue bill moving through Congress would allocate $7.5 billion in grants and $7.5 billion in zero-interest loans to states to buy foreclosed homes, rehab them, and resell them. The bill, sponsored by Rep. Maxine Waters (D-Calif.), cleared the House on Thursday. A Senate bill including a similar provision passed in April, appropriating $4 billion to the task.

But even if a version of these proposals becomes law, the effort could face significant challenges. Some cities that have individually attempted to buy and manage vacant properties have struggled to maintain the homes and found few ready buyers.

In 2002, the city of Baltimore started to buy abandoned properties in an effort dubbed "Project 5,000" for the number of homes it wanted to purchase. Now, the city owns more than 10,000 vacant properties but hasn't found an efficient way to unload them. The city's latest attempt to fix the problem - establishing a nonprofit land bank to control them - is estimated to cost $2.8 million.

Republicans who oppose the idea say that it would give an incentive to lenders to more quickly kick out homeowners, since they can pawn off the home on local governments.

Supporters say it's a way to create affordable housing, while stopping vacant homes from becoming rundown and blighting the surrounding neighborhood.

Under the House plan, the Department of Housing and Urban Development would dole out the loans and grants based on the number of foreclosures and home prices in an area. Cities could use the money to buy foreclosed homes, renovate the homes to make them compliant with housing codes, and resell or rent them.

The homes can't be resold to buyers who make more than 140% of the area's median income and some funds are reserved for low-income buyers.

Loans would have to be repaid within two years if used for single-family housing or within five years if used for rentals.

And if a buyer resold the house for a profit after he bought it from the city, the federal government would keep 20% of the profit.

The U.S. Council of Mayors has lobbied for the bill, soliciting mayors across the country to call local congressmen in support of it. While the current bill will only distribute the money to the country's most populous cities, the council is attempting to expand it to include more cities.

In many cases, nonprofit groups would help cities manage the programs and they think the funds can be put to good use. "There's no question that we need this money. It's essential if we want to mitigate the impact of foreclosures on urban neighborhoods," said Patrick Morrissy, executive director of Housing and Neighborhood Development Services in Orange, N.J. The nonprofit has bought and rehabbed homes for more than two decades.

Morrissy's group must typically spend about $160,000 to acquire, renovate, and maintain a home. So far, the group has rehabbed about 130 homes and resold them at a discount to first-time and low-income home buyers.

Some towns, like those that have been hit by mass layoffs before, have experience handling vacant homes, says Jennifer Leonard, director of the National Vacant Properties Campaign, a group that tries to promote best practices in city programs to rehab abandoned homes and land.

Those seasoned programs can effectively stop vacant homes from blighting their communities, she says.

But the learning curve can be steep for cities that have no experience buying and selling foreclosed homes, she says. To that end, the campaign has asked Congress to include provisions in the bill that allow some of the money to be used to raise cities' capability to manage properties and then resell them.

Still, some real estate analysts don't expect the plan to have an impact on the housing market.

Relative to the foreclosure crisis, $15 billion is a drop in the bucket. According to foreclosure tracker RealtyTrac, about 650,000 foreclosure filings on properties were submitted in the first quarter. If the $15 billion were used just to buy homes with an average price of $100,000, states could purchase 150,000 homes.

Another problem is that the bill is targeted toward the low-end of the housing market, which may limit its scope - the bill allows the purchase of single-family homes with a purchase price no greater than 90% of the area's average.

Finally, some worry that cities would be getting in over their heads. "I don't buy that it's going to work," said Vincent Valvo, group publisher of The Warren Group, a Boston real estate analyst. "If cities were good at buying, selling, and developing things, we wouldn't need private developers."