Correction to This Article
An earlier version of this story noted that nearly 45 million properties not facing foreclosure will decline in value by a total of $233 billion by the end of next year. According to the Center for Responsible Lending, those numbers have been updated to reflect that 41 million properties will decline by $356 billion. The figures have been changed below.

Mortgage Crisis Reverses Tide of Urban Renewal

By Lori Montgomery
Washington Post Staff Writer
Tuesday, July 22, 2008

BALTIMORE -- On Reservoir Hill, just north of downtown, one of this city's most hopeful revitalization projects is falling apart. Over the past two years, 95 properties have fallen into foreclosure. On one dismal street, three blocks of apartment buildings and rowhouses -- many freshly renovated -- stand vacant, their doors and windows boarded over to ward off thieves.

Eighteen months ago, Reservoir Hill was a prime example of the progress that cities across the country have made reclaiming blighted neighborhoods as a nationwide housing boom helped lure homeowners and chase away crime. Now the mortgage crisis threatens to reverse those gains as foreclosures multiply, house prices plunge and vacancies rise.

The plight of the cities has become the focus of intense negotiations over a far-reaching housing bill pending in Congress. In exchange for their support for a Bush administration plan to rescue ailing mortgage finance giants Fannie Mae and Freddie Mac, Democratic leaders are demanding $4 billion in emergency aid to stabilize hard-hit communities by purchasing vacant and foreclosed properties.

But the White House as recently as yesterday threatened to veto the bill unless the money is removed. "It is astonishing to me that the Democrats would want to say, 'Oh, that's great. Now that we have them over a barrel, let's use this as an opportunity to get spending in the bill,' " said White House spokesman Tony Fratto. "This is a wasteful program that will not help the housing correction and will primarily serve as a bailout to those very lenders who foreclosed on homeowners."

House Democratic leaders say they won't be able to persuade urban liberals to vote for the expanded housing package without the funding. Democrats in both chambers question whether President Bush would veto a bill that included the administration's urgent request for authority to prop up Fannie Mae and Freddie Mac by authorizing the Treasury Department to lend the firms money or buy their stock. As lawmakers and administration officials haggled yesterday over final details of the 600-page housing bill, aides said the House vote could be put off until Thursday.

"I can't imagine how in one breath they could ask me for unlimited authority to give unlimited credit to Fannie and Freddie . . . and turn around and complain to me that we can't provide relief in this situation," said Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.). "I find it somewhat hypocritical, and most people will as well."

The administration's opposition has infuriated a coalition of Democratic governors, big-city mayors and community activists, who say the money is their best hope for stabilizing communities where the battle against blight had so recently been won.

"They don't understand the market dynamics here at all," said Paul Graziano, Baltimore housing commissioner. "We can let the market adjust and see the last seven or eight years of investment go down the tubes. Or we can intervene now to reclaim this inventory and protect these neighborhoods."

The damaging effects of even a single foreclosure on a community are well-documented. Prices of surrounding homes fall, and houses become tougher to sell. The Center for Responsible Lending projects that nearly 41 million properties not facing foreclosure will decline in value by a total of $356 billion by the end of next year.

But foreclosures are even more destructive when they come in clusters, as is happening now. A growing body of research suggests that lenders targeted minority neighborhoods, persuading buyers to take out high-cost mortgages with no money down or low initial monthly payments that later ballooned. In majority black and Latino cities such as Detroit, Miami and Baltimore, nearly half of all home loans in 2006 were high-cost, subprime loans, according to data assembled by the nonprofit Local Initiatives Support Corp. (LISC).

Subprime loans often helped drive reinvestment in the same troubled neighborhoods that local officials had targeted for redevelopment, said Chris Walker, research director at LISC. That appeared to be a good thing until the loans reset, and borrowers began to default. Now those communities are being battered by foreclosures, and many of the properties are either abandoned or left to stand vacant for months.

"These are areas that have really recovered in some ways miraculously from where they were 20 to 30 years ago," said Shaun Donovan, housing commissioner in New York City, where foreclosures have been concentrated in "five or 10 largely minority areas," including East New York; Brooklyn; and Jamaica, Queens. "The progress we made in so many of these communities has the potential to be unraveled by what's happening."

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