Communities Buy Foreclosed Homes to Prevent Decay

As a wave of home foreclosures courses through the United States, some of the nation’s hardest hit cities think they have found a way to ease the blight left on their communities by the crisis.

Using taxpayer and private money, Boston, Minneapolis, San Diego and a handful of other places are buying foreclosed properties to refurbish and resell them to developers and homeowners in an effort to prevent troubled neighborhoods from sliding into urban decay.

The efforts so far have been taken on a small scale. But local officials say they can become an important pillar of any housing recovery with the help of $4 billion in federal grants that were part of a housing bill Congress approved in July.

Indeed, the sale of foreclosed homes — not just to city governments but more broadly to investors and homeowners — contributed to a 3.1 percent increase in existing home sales in July, the highest level in five months, according to data released on Monday by the National Association of Realtors.

That hardly means that the housing crisis is over, because the number of homes for sale climbed to another record level as more people put their homes on the market. But without buyers taking foreclosed homes at steeply discounted prices, the problem would be even worse.

Some advocates of free markets say those increased sales should address the rising heaps of distressed properties. But many mayors say the market is not moving quickly enough because lenders overwhelmed by foreclosures are not able to sell repossessed properties fast enough.

Many developers and home buyers are also not willing to take a chance on dilapidated properties in distressed neighborhoods. With some homes staying vacant for months or even years, the government, they say, needs to act as an intermediary.

A home is advertised for sale at a foreclosure auction in Pasadena, California.
Reed Saxon
A home is advertised for sale at a foreclosure auction in Pasadena, California.

In a distressed patch of the Dorchester section of Boston, the city recently bought four foreclosed houses on Hendry Street and resold them to a local developer who will refurbish them and put them back on the market.

At the same time, the city has increased street cleanings and police patrols, and has hired more social workers to help residents. Although the area was constantly torn by gang violence and chronic joblessness, property prices surged at the height of the housing boom, providing hope of a better future.

But the collapse in property values left an unmistakable bruise: The four homes, two of which sold for $550,000 each at the market’s peak, were bought for a total of $314,000 by the city.

Standing in front of darkened and boarded up houses, Mayor Thomas M. Menino said these types of interventions would breathe new life into neighborhoods riddled with foreclosed property. “Our job as the city government is to restore these neighborhoods,” he said. “We can’t let this cancer continue.”

Residents like Luis Rodriguez, a native of the Dominican Republic who earlier bought a fixer-upper across the street, expect the city’s efforts to lift real estate values, and earn him a tidy profit if he decides to sell. “With the mayor’s help, I think the neighborhood will be a lot better,” he said.

Antonio Gonçalves, a 36-year-old electrical worker who lives in the neighborhood, was less sure. He is interested in a home in the area, but the slowdown in construction means that he is not always working full time. “Even though prices have come down, who knows what is going to happen in two years?” said Mr. Gonçalves, a native of Cape Verde, the island nation off the west coast of Africa.

The ailments plaguing parts of Boston are not the same as elsewhere in the country, and each community requires a tailored approach.

In Cleveland, Detroit and other places in the Midwest, the effects on neighborhoods from the mortgage crisis are exacerbated by a shrinking population, which is forcing officials to turn to grimmer solutions.

Some officials there have concluded that the only way to revitalize certain neighborhoods is to demolish run-down homes and turn the land into small parks or side yards for neighbors who remain.

That approach was pioneered by Genesee County in Michigan, which is also plagued by a declining population and a struggling auto industry. It created a land bank to acquire properties on which owners had not paid local taxes. The land bank has acquired 7,400 properties since it was created in 2002, including about a third of all vacant homes in the county, said Daniel T. Kildee, the county treasurer who oversees the project.

The bank has turned 2,500 of them into parks, yards or refurbished homes; it is holding onto the rest until it finds a use for them. Inspired by Genesee County’s success, officials in Cuyahoga County, Ohio, which includes Cleveland, have asked the state legislature to let local governments create similar land banks.

In the Southwest and in Florida, cities whose housing markets are among the worst-hit, are eager to buy foreclosed properties for resale, but must wait for federal money. While long-term prospects in these places are somewhat better because the population is still growing, they face an immediate challenge from a decline in property tax revenue.

Many of the hardest-hit areas also are far from job centers. San Diego, a city grappling with swaths of foreclosures, is better positioned to take a more sweeping approach. Officials there are raising private money to acquire, refurbish and resell hundreds of properties.

Investors including the California State Teachers’ Retirement System and the Washington Mutual bank have committed $20 million so far, said Jim Bliesner, director of the San Diego Reinvestment Task Force, which plans buy its first homes by the end of the year.

“This has to be large enough to deal with the problem at scale,” Mr. Bliesner said. “We have 14,000 properties in foreclosure. If we fix up four of them, it doesn’t make a difference.” The involvement of local governments has not been free from controversy.

The White House, for instance, opposed the $4 billion in federal grants. Daniel J. Mitchell, a senior fellow at the libertarian Cato Institute, argued that the task of putting families back in foreclosed homes should be left to banks and real estate buyers.

The hand of government, he added, would distort the market and siphon capital away from better uses. “The more government is involved, the more political and bureaucratic decisions are made,” he said. “The more the market is involved, the more efficiency is used.”

Local officials say they are trying to jump-start the housing market, not supplant it. In Minneapolis, some homes in the lower-income north side of the city have been vacant for up to five years. The Greater Metropolitan Housing Corporation has trouble locating officials at mortgage companies who have the authority to sell the properties, said Carolyn E. Olson, president of the group.

The effort, which is financed by the city of Minneapolis and the state housing agency, is similar to Boston’s approach. Still, it has bought 75 homes in an area that had 1,500 foreclosures last year and has about 500 vacant homes; it hopes to do more with the federal grants.

Ms. Olson said the group would have to buy and improve only a fraction of the vacant houses, and the market would do the rest. “You try to strategically do what you think you can and where it will work,” Ms. Olson said.

Mortgage industry officials acknowledge that they have struggled to deal with the unprecedented number of foreclosed homes. A group of banks has been working on streamlining the process of selling homes to local governments and community groups through the Housing Partnership Network, a Boston-based umbrella group for local community groups.

JPMorgan Chase is one of the banks talking with the group. A spokesman said negotiations with cities and community groups often boiled down to a disagreement about home prices. Local officials often want to pay less than what other home buyers will bid.

The housing bill, in fact, stipulates that federal money be used only to buy homes at below-market prices. “We want to get somebody to buy it and have the house occupied and keep the community moving forward,” said Thomas A.Kelly, a spokesman for the home lending division of JPMorgan Chase. “But we have an obligation to our investors to get as high a price as we can.”

Lenders and public officials will have to come up with a workable compromise for these nascent efforts to be successful, said Michael A. Stegman, director of policy and housing at the MacArthur Foundation, a nonprofit grant-making organization. “This really is a question of balancing price discounts, losses and prices with what is in the best interest of the community.”