Things are bad for the 15 communities that explored a desperate housing bailout

A sign showing a foreclosure home in Texas for sale in August 2006. (David J. Phillip/Associated Press.)

How bad do things have to get for a community to consider a housing bailout of its own?

Pretty bad. The at least 15 communities around the country that are or have considered seizing homes lag behind on several economic indicators, according to a new Urban Institute report. Each of the cities have at some point turned to the idea of taking ownership of underwater homes through eminent domain — which allows governments to forcibly buy property — and selling them back to homeowners at a deep discount.

Richmond, Calif., is probably the most famous example — and one of the closest to actually doing it. The Bay Area city has been warned by big banks and the credit rating agency Moody’s that the plan could hurt its housing recovery by forcing mortgage interest rates up and discouraging new loans. Richmond hasn’t backed down, though, and is still exploring the option. It’s no wonder why.

The Urban Institute report compares the 15 cities that have considered using eminent domain along several factors, and they lag behind national and regional averages on virtually every one.

“These 15 communities suffer from high unemployment, stagnant incomes, high poverty, high proportions of cost-burdened homeowners, and high vacancy rates,” according to the report.

All but one have unemployment somewhere between 10 and 18 percent, well above the national average of 7.3 percent. In six of those communities, more than one in five people lives in poverty. They tend to have lower incomes than their neighbors or states, too.

With conditions so bad, and state and federal governments not doing enough yet to fix them, it’s no surprise that these places are considering taking back homes through dramatic means. But doing so likely won’t fix the longstanding problems.

“This plan might not actually alleviate any of the stress that they’re facing or it’s not going to fix any of the problems that they’ve had which are sort of chronic problems that were there before the crisis,” says Pamela Lee, the report’s author.

Both sides, she says, are overstating the significance of the strategy: It won’t rescue failing cities in one swoop, and it won’t destroy confidence or willingness to do business in local economies.

“The impacts won’t be as far-reaching as they hope, or they think,” she says.

Critics and supporters of the tactic have another thing in common, according to the report: a belief that the best solution is a federal one. The only problem is no one knows how long that might take.