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TARP Funds Used to Demolish Homes in Detroit to Lift Prices

MAR 3, 2014 12:00pm ET
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In Flint, once a thriving auto-industry hub, excavators with long metal arms and shovels have begun tearing down 1,500 dilapidated homes in an attempt to lift the housing market.

The demolitions in this Michigan city of about 100,000 people are part of the stepped up efforts by officials in several Midwestern states to rid their blighted neighborhoods of decayed housing that's depressing prices. The funding for the excavator work comes from a surprising source—the Hardest Hit Fund of the Troubled Asset Relief Program, or TARP, created in 2008 to stabilize to the financial system.

The $7.6 billion Hardest Hit Fund was intended to help troubled property owners avoid foreclosure and keep their homes. As foreclosures fall in most parts of the country, the fund is using the unspent $3.2 billion to remedy the crisis of abandoned homes. In Detroit alone, 70,000 dwellings, or about 19% of the total, may need to be torn down, according to the city.

"While demolition wasn't explicitly part of the initial program, policymakers are right to use the money to remove decaying properties," said Raphael Bostic, director of the Bedrosian Center at the University of Southern California.

"When a lot of these mortgage-relief programs were set up, demolition was not an acceptable use," said Bostic, a former assistant secretary at the Department of Housing and Urban Development. "There are a number of places—Detroit, Flint, for example—where there are just far more houses than people to live in them."

The populations of cities such as Detroit and Cleveland have been declining for decades as people moved to suburbs and other states with better job markets. They sometimes left behind abandoned houses.

The number of empty dwellings has grown since the housing crash as people lost their homes to repossession, according to a February report by Griswold Consulting Group in Lansing, Mich. The group examined the effect of demolishing distressed buildings in Cleveland from 2009 to 2013.

"Predatory lending and the fallout of the mortgage crisis hit Cleveland hard," emptying more homes, according to the report. "The mortgage crisis merely exacerbated a pre-existing condition for the Cleveland region and countless other older industrial cities across the American Midwest."

A thriving auto-making center of 1.85 million people in 1950, Detroit has a population of only 700,000 today, leaving huge swathes of the city empty. In Detroit's Brightmoor neighborhood, many blocks in the four-mile-square area have only one or two occupied dwellings. The few carefully maintained homes contrast with burned out shells next door and debris strewn across lots. Homes lack doors or windows.

Detroit, which filed the biggest U.S. municipal bankruptcy last year, is getting about $52 million from the Hardest Hit Fund. The city plans to use money for demolition of houses in stronger markets where the land could be redeveloped, according to the Detroit Land Bank Authority, a government group that acquires, manages and disposes of tax-foreclosed and vacant properties.

Newly elected Detroit Mayor Mike Duggan has centralized the city's efforts to tear down buildings and fight blight with a new Department of Neighborhoods, he said in a Feb. 26 state of the city speech.

"How many neighborhoods in this city do we have a solid block and one burned out house that is depressing the values of everyone else in that community?" Duggan said in the speech. The city is going to "start to roll through the community and take down those houses and start to bring those blocks back."

The Hardest Hit Fund is deploying $48 million more in Flint, Grand Rapids, Pontiac and Saginaw. Genesee County, where Flint is located, plans to flatten 1,600 homes using the financing, and another 3,500 should be destroyed, according to Douglas Weiland, executive director of the Genesee County Land Bank Authority, a government agency that manages tax-foreclosed properties.

In Cuyahoga County, which includes Cleveland, more than 6,000 troubled properties have been torn down since mid-2009, and about 10,000 to 15,000 blighted homes remain in the region, according to the Griswold report.

"The victims of the foreclosure crisis are not only the people who were given predatory loans—it’s also their neighbors and the communities they’re in," said Ed Herman, a Cleveland attorney and consultant to Thriving Communities Institute, a group that works with local governments to help neighborhoods hurt by vacant homes.

Ohio will use $60 million from the Hardest Hit Fund to demolish structures in "tipping point neighborhoods," where homeowners remain and removing blight can have a stabilizing effect, according to Cindy Flaherty, the director of homeownership at the Ohio Housing Finance Agency.

Illinois also is considering using some of its Hardest Hit money for demolition, said Rebecca Boykin, a spokeswoman for the Illinois Housing Development Authority. Indiana said on Feb. 3 that the Treasury Department gave it approval to use $75 million of Hardest Hit money for taking down housing.

A growing economy and rising house prices have helped reduce foreclosures, freeing money from the Hardest Hit Fund for demolitions. The U.S. foreclosure rate dropped to 2.9% in the fourth quarter from 4.6% three years earlier, according to the Mortgage Bankers Association. The S&P/Case-Shiller index of property prices in 20 cities was up 24% in December from its March 2012 low.

Destroying abandoned properties has many beneficial effects, according to the Griswold report. Some of the buildings may be used for illegal activity, including storage of stolen goods, arson, drug abuse and prostitution.

Once the eyesore of dilapidated housing is gone, neighbors are more likely to maintain their own properties, Herman, the Cleveland attorney, said. Neighborhoods cleaned up by demolitions have steeper declines in mortgage foreclosure rates than those that don’t remove the blight, according to the Griswold report.

"Ultimately you create a fresh piece of dirt that could be used in another way that might make economic sense in the future," said Mark Dotzour, chief economist at the real estate center at Texas A&M University in College Station, Texas.

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