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
As vote on housing bill nears, Congress wrestles with whether to help ailing neighborhoods like Baltimore's Reservoir Hill.

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."

Some communities already are overwhelmed. In Detroit, the vacancy rate jumped from 10 percent of addresses in December 2005 to 16 percent in March, according to Todd Richardson, a Department of Housing and Urban Development official asked by Congress to identify cities with high concentrations of vacancies due to foreclosures.

Unless a property attracts a nuisance complaint, vacancy is difficult to track. But by mapping data on subprime loans alongside information on unused addresses collected by the Postal Service, Richardson was able to pinpoint big spikes in vacancy rates in cities across the industrial Midwest, Florida, Southern California, Arizona and Nevada.

Not every foreclosure leads to a vacancy. Some places have weathered skyrocketing foreclosure rates without widespread decay. Prince George's County, for example, the nation's wealthiest majority black jurisdiction, is awash in high-cost loans and has recorded more foreclosures than any other jurisdiction in Maryland. But the foreclosures are widely dispersed, the market remains reasonably strong, and the houses generally are not vacant for long, Richardson and other analysts said.

The story is similar in the District. A quarter of home loans in 2006 were high-cost, according to LISC data, and the city has seen more than 2,000 foreclosures since the beginning of last year. But HUD data show no significant increase in vacancy. Deputy Mayor Neil Albert said that because house prices in the District are still rising, most foreclosures are quickly repurchased.

Vacancy appears to be more of a problem in Northern Virginia, where Fairfax County officials recently voted to purchase foreclosed properties to stabilize hard-hit neighborhoods, though HUD data do not show big spikes there, either.

Compare that with Baltimore, which ranks high on LISC's list of jurisdictions at risk for concentrated foreclosures. In 2006, 47.4 percent of all home loans in Baltimore were high-cost loans. (The city has sued Wells Fargo Bank, claiming that it targeted poor neighborhoods with predatory loans.) Over the past year, more than 4,500 properties have fallen into foreclosure, and the vacancy rate has jumped from 5.9 percent in 2005 to 8 percent in March.

Reservoir Hill is Graziano's biggest disappointment. Long riddled with drug dealers and vacant properties, the neighborhood has many positive attributes, including proximity to downtown, Druid Hill Park and the MARC train station. It is also filled with gracious brick townhouses.

About five years ago, the city used tax liens to gain control of dozens of troublesome properties and sold them to a handful of developers, whose rehabs drew a steady stream of new homeowners to the neighborhood. The average home price doubled, from $70,900 in 2001 to $145,000 in 2006, with some rehabs selling for more than $400,000.

"It just needed some intervention to prime the pump," Graziano said. "It was one of the biggest success stories in the city in terms of transformation."

But then the subprime crisis hit, and work ground to a halt. Through April, 95 properties had fallen into foreclosure, nearly 7 percent of the area's addresses. Many were investors who couldn't afford to complete renovations. Among the victims: A six-unit building on Callow Avenue, in the heart of Reservoir Hill, that now stands empty, one new front window shattered, another pocked with bullet holes.

The empty buildings make it impossible to interest buyers. No sales have been made on Callow Avenue in months, said Carl Cleary, director of neighborhood development at the Reservoir Hill Improvement Council. "Realtors say it's an uphill climb just getting folks out of the car," he said.

Three blocks away, developer Chukes Okoro can point to four foreclosed properties from his backyard deck. Earlier this year, he bought and renovated one of them. But no one has responded since he listed it for sale at $395,000 two months ago.

Last year, a similar townhouse sold in a single day for $465,000, Okoro said, adding: "I try not to think about what's happening to the property value."

Nonprofit developers have approached Graziano about buying foreclosures and fixing them up for low-income home buyers. But the banks that hold the properties have so far refused to offer them at a discount, meaning the nonprofits would need city subsidies. But with the slowdown in the housing market, Graziano said, deed transfer taxes have plummeted and the city's budget is tight.

White House officials say that an infusion of federal funds into a place like Baltimore would only enrich the banks, which continue to demand prices the market no longer will bear. Graziano sees it differently. "We know that vacant houses have a profound impact on neighborhoods," he said. "If we could intervene, we could stop the bleeding."

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