Foreclosure crisis: The $4 billion fix

Washington will give funds to states and cities to rehab houses. Proponents say it will help stabilize neighborhoods, but others say it's too little to do much good.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- City officials and community activists can't wait to get their hands on nearly $4 billion the federal government is about to inject into blighted neighborhoods suffering from record foreclosures.

Opponents of the measure say the paltry sum won't do much good considering the number of vacant homes on the market - one million families are expected to lose their homes this year - and will more likely turn into a political boondoggle.

It remains to be seen which side is right. But the program - part of the massive housing rescue bill Bush enacted last month despite his own misgivings - will serve as one test of Washington's ability to mitigate the foreclosure crisis.

The U.S. Department of Housing and Urban Development is expected in late September to come up with a formula for how to distribute $3.92 billion to states and cities nationwide to turn foreclosed property to affordable housing for sale or rent.

The funds are intended to help communities deal with the flood of vacant homes, which drain public resources and drag down property values of neighboring houses.

"This money will help get neighborhoods hard hit by foreclosures back on their feet again," said Jeff Falcusan, policy advisor for the National Association of Housing and Redevelopment Officials, a trade group.

Congress mandated that the money be allocated based on the number and percentage of foreclosures, homes financed with subprime loans and homes in default or delinquency in the community. Once the formula is set, HUD has 30 days to dole out the funds. Government officials then have 18 months to put the money to use in their neighborhoods.

In addition to buying and fixing up homes, municipalities can use the money to demolish blighted structures and redevelop vacant land. The foreclosed property must be bought at a discount from its current appraised value to avoid bailing out the lenders.

Local governments could rehab the properties on their own or with the help of public housing authorities. They could also partner with community groups.

The program is also designed to increase the affordable housing stock in the community. The law mandates that the homes be sold or rented to families at or below 120% of the area median income, with one-quarter of the funds set aside for families at or below 50% of median income.

Communities "will have the opportunity to put these houses back into productive use," said Steve Adamske, communications director for the House Committee of Financial Services.

Vacant homes = trouble

Vacant properties can cause big problems for municipalities. As the number of abandoned homes multiplies, property tax revenues fall. Yet, the vacant houses often require more public resources, including frequent visits by police, health department and code enforcement officials. And they hurt property values of surrounding houses.

In Tucson, Ariz., which has been hit hard in the housing slump, abandoned pools have been a particular concern because they attract West Nile-carrying mosquitoes, said Emily Nottingham, the city's community services director. Neighbors also complain about dilapidated houses and overgrown gardens.

"It can really become an eyesore for a neighborhood," she said. Vacant houses "can attract squatters and if the weeds are overgrown, it's harder for adjoining houses to be sold. Pools turn green and attract mosquitoes."

Foreclosures are a widespread problem in Tucson. It already has 4,000 foreclosed properties on the market and is expecting the number to grow. The city is projecting 8,000 homes to enter foreclosure this year - some of which are already up for sale - and another 8,000 in 2009.

The key to using the federal funds most effectively is concentrating efforts in particular neighborhoods rather than scattering the money around town, experts said.

"Target neighborhoods where it can make a difference," said Buzz Roberts, senior vice president for policy at Local Initiatives Support Corp., a national non-profit group which focuses on rebuilding low-income communities.

Local rehab efforts

Rehabbing blighted communities is nothing new for many municipalities and community groups, experts said. Numerous efforts are underway to address the mess left behind in the foreclosure crisis, said Ali Solis, vice president for public policy and industry relations at Enterprise Community Partners, a non-profit group that develops and finances affordable housing.

For instance, Living Cities, a collaboration of corporations and philanthropies, is doling out $10 million in grants to renovate foreclosed properties. The initial recipients include Dallas, Detroit, New York and Washington, D.C.

In Cincinnati, local officials are hoping to use the federal funds to augment a $1.25 million revitalization effort already in the works, said Michael Cervay, director of community development.

The funds should allow the city to demolish or fix up hundreds of vacant homes. The city has about half of the 5,600 homes that went into foreclosure in Hamilton County in 2007. Even more foreclosures are expected this year.

"It will make a significant impact on the problem in Cincinnati," he said.

A drop in the bucket

Some foreclosure experts, however, said that the funding is too little to have any real effect, especially in the hardest hit areas. California, for example, had 209,000 homes go into foreclosure over the past year, said Sean O'Toole, founder of foreclosureradar.com, a foreclosed properties website for real estate professionals.

"$4 billion is kind of a meaningless sum," O'Toole said. "It can't possibly make a difference. You've brought a pistol to a nuclear war."

Converting foreclosed houses into livable homes may prove a big challenge for many municipalities, said David John, senior research fellow at the Heritage Foundation, a conservative think tank. He foresees a lot of the funding going to waste in poor planning or fraud.

Also, because of the weak housing market, local officials might find themselves unable to unload the houses once they are renovated at a price the recoups the repair costs, he said.

"The money could be better used for other purposes," John said. "State and local government have a rather bad record of managing this kind of activity. They don't really have much expertise in retail housing." To top of page

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