Wednesday, Sept. 10, 2008 | Attempting to fight urban decay in San Diego’s neighborhoods hit hardest by foreclosure, a plan to buy up foreclosed properties here is gaining traction and some national attention.
The plan, known as a land bank, would assemble taxpayer, private and philanthropic dollars to purchase foreclosed houses. The predominance of foreclosed properties in some neighborhoods has government officials concerned they’ll slip into blight, left to become vacant magnets for vandalism and fall into disrepair before they can be repurchased by homeowners from the banks.
Through a centralized agency, the houses would be fixed up and made available for sale or rent to low- and moderate-income residents. The plan has been discussed for several months and will be presented Sept. 18 to the regional committee charged with encouraging housing and economic improvement in low- and moderate-income neighborhoods.
“It’s bad for the city as a whole for these neighborhoods to become vacant ghettos again,” said Jim Bliesner, director of the City-County Reinvestment Task Force. “We have responsibility to attempt to influence the direction of those private funds.”
With foreclosures mounting and prices falling, lawmakers from the local to the national levels have been searching for months for a way to bandage the bleeding housing market and shore up its spillover damage to the greater economy. Government intervention in the housing market crescendoed this week with the federal government’s takeover of mortgage giants Fannie Mae and Freddie Mac. The move followed Congress’s foreclosure prevention law passed in July.
As part of that action, the federal government made available $4 billion to help state and local governments purchase foreclosed houses for the purpose of “neighborhood stabilization.”
The push for a land bank comes after local governments have worked strenuously to artificially lower home prices for the region’s low- and moderate-income residents during the years-long housing boom. The programs have included loans to help such residents purchase homes and the subsidization of for-sale units at below-market prices.
Now, falling housing prices have made homes more affordable, lessening the gap between incomes and the cost of purchasing a home. In some places, the market has begun to compete with the restricted prices instituted by government on “affordable” units.
By purchasing homes in neighborhoods that could have further to fall, the land bank attempts to stop the bleeding of home values for owners in foreclosure-heavy neighborhoods. The plan’s supporters acknowledge that by opening a net under falling prices, the action potentially undercuts the market’s own mechanism for achieving affordability — falling prices.
“It’s a big ocean, you know?” Bliesner said. “The land bank isn’t going to be large enough to buy [all of] the houses currently in foreclosure on an ongoing basis. Both can coexist.”
But even contemplated on the national level with $4 billion allotted for such programs, the idea falls short in light of the extent of the foreclosure problem, said economist Chris Thornberg, principal at Beacon Economics.
“It’s a drop in the bucket,” he said. “It’s not going to stop anything.”
The business plan and strategy for the local land bank was delegated to Barry Schultz, CEO of the San Diego Capital Collaborative, a nonprofit that focuses on investing in San Diego’s urban low- and moderate-income communities.
His organization manages the $90 million San Diego Smart Growth Fund, and a potential $20 million to $30 million from that fund could be used to kick-start the land bank. That initial deposit is not definitely promised, though a recent national news report referencing the San Diego plan said it had $20 million already raised.
Schultz said the goals of those who would let the prices continue to fall in a hard-hit neighborhood are different than the goals of the land bank. Keeping government out of the market in these neighborhoods is inappropriate, he argued. The market has never performed well in low- and moderate-income neighborhoods, Schultz said.
“It is a leap of faith to think that will change. It’s in their interest to see the market continue to fall, because the lower they can buy, the more profit they can make on the back end,” he said.
The land bank plan takes money from private and philanthropic investors and adds it to whatever government funds it can secure, forming an agency to oversee the operation. With the seed money, the agency would try to negotiate with a bank to purchase repossessed homes in bulk — choosing those homes based on where foreclosures have hit hardest. The agency would rehab the homes, focusing on paint and landscaping, structural fixes and energy and water efficiency.
Then it would make the homes available for sale or rent to various income levels, probably at or below the area median income, about $72,000 for a family of four. Government funds might go to assist the buyers of those homes with down-payments or with financing. The hope is that every home purchased, rehabbed and resold to a homebuyer will serve to float the surrounding houses’ sinking values.
The plan’s supporters see their efforts through the lens of neighborhoods such as City Heights.
Bliesner said the effect of incentivizing redevelopment of neighborhoods like City Heights is far-reaching. In previous housing downturns, many properties in that area were snatched up by out-of-town investors and fell into disrepair, with lawns overgrown, structural damage left unrepaired, and windows boarded up without owners around to care or fix them.
Several philanthropic groups, and city redevelopment staff, turned their attention to that community and worked to increase its value — efforts that seemed to be paying off. But prices have fallen drastically in the neighborhood, reversing the gains in equity for many of its residents.
The price per square foot paid for detached homes there has fallen by nearly 50 percent since summer 2006, according to DataQuick Information Systems.
City Heights made the top-10 list for ZIP codes hardest hit by foreclosure in July, according to DataQuick. A large majority of the homes on the market in the neighborhood are must-sell houses — bank repossessions or short sales, homes listed for less than is owed on the mortgage. Such is a recipe for repeated history, Bliesner said.
“What’s happening is a sharper-than-the-norm decline in property values related to the number of foreclosures,” Bliesner said. “So, take a stick and stick it in the wheel and see if you can’t do something for that bad thing that’s happening in that neighborhood.”
The $4 billion in federal funds is expected to start flowing by the end of the year. The federal funds allotment gave a boost to the land bank plan, which suffered a setback when San Diego was passed over for a $1 million private grant previously envisaged to catalyze the land bank’s formation.
One of the reasons for San Diego’s failure to secure that private grant was the lack of a central overseer and infrastructure for the land bank program, said
“There wasn’t a regional strategy,” Schultz said. “And that’s kind of what we’re saying. We need to have an entity somewhere.”
It’s unclear at this point how exactly the “public” — government staff time or taxpayer dollars — would fit into the public-private-philanthropic partnership for the land bank.
“I don’t think that anybody at this point in time has decided exactly what they want to do,” Schultz said.
One potential setup would dedicate private investor and philanthropic funds to acquiring the properties in bulk from the banks who’ve foreclosed on them. For the houses purchased by the private funds, city or county or federal funds could be used to rehab them, or to make available more homebuyer assistance programs for buyers of the land bank homes.
San Diego City Councilman Tony Young is co-chairman of the Reinvestment Task Force. He said he’d be more inclined to direct public funds into homebuyer assistance programs that already exist, instead of making government a landowner.
“The less government money, the better,” he said. “You can be helpful in the process, and there’s a lot of things that we’re trying to do when it comes to housing. But the government involvement should come after the private options have been explored.”
Schultz said he sees a clear reason to invest in the low- and moderate-income neighborhoods.
“They had the least and they are now losing the most,” he said.
Correction: The original version of this story misstated the date of the upcoming task force meeting. It is scheduled for Sept. 18, not Sept. 17. We regret the error.