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Cities Take Back Keys To Save Blighted Areas

Block after block, abandoned bungalows and empty frame houses line areas of downtrodden South Chicago. Some show signs of previous home improvements (new roofs, freshly painted siding), but most are boarded up and likely stripped bare of interior appliances, flooring, wiring and plumbing.

They are a bane to neighborhoods and cities, as well as the real estate-owned portfolios of the banks and servicers stuck with these discarded, and mostly unmarketable, homes. "I can take you through parts of Chicago where REOs are for sale for $20,000, and you can't get a nibble," said Rob Grossinger, a Chicago-area community affairs executive with Bank of America.

Breathing life into these blighted areas is what Congress had in mind when it passed the Housing and Economic Recovery Act in 2008. By giving cities and counties $4 billion to buy up unwanted foreclosed housing through community block grants (an additional $2 billion was awarded in January), local officials could deputize nonprofits and investors to rehabilitate discarded homes and promote stabilization efforts in low- to moderate-income neighborhoods.

What's just ramping up now is a mechanism for cities to directly buy these homes out of banks' REO portfolios. A trust organized by national nonprofit housing organizations has been created to act as a middleman between cities looking to acquire abandoned homes and the lenders looking to unload them.

The National Community Stabilization Trust, which grew out of a pilot program that ran in several cities, has established ties in 120 markets to give cities a first look, and a 10% to 15% market discount on REOs.

For up to two weeks before a bank puts a property on the market, cities, through the NCST, have an exclusive period to purchase houses located in community development zones designated for federal funding.

"We have working relationships with all the big players-Bank of America, Wells Fargo, Chase, Citi, Fannie, Freddie, GMAC and others," says Craig Nickerson, president of the NCST, a Washington-based organization backed by the National Urban League, the Housing Partnership Network, and three other housing groups. "In effect, we've become a facilitator, a clearinghouse."

Mary Gabler, senior vice president, and community development manager at Wells Fargo, says the NCST can play a crucial role in helping large servicers deal with a flood of requests from city housing agencies. "We knew once the money started flowing from the government, we would be getting hundreds of calls" that could overwhelm Wells' servicers, says Gabler.

Through the end of February, the NCST sent information on 12,000 bank-owned properties to cities and their public agency contacts, leading to 1,400 property purchases. Banks have absorbed more than 1.8 million REOs the past two years, according to RealtyTrac, but it's unclear how many would be eligible for the NCST program.

The homes must already be in zones designated for the federal funds, which are administered by HUD. Both sides still have to negotiate, too: the bank may find a better deal from a private investor, and the discount price may still prove too expensive to cities with green building and energy-efficiency standards enforced on rehabs.

Glen Fest is a reporter for US Banker.

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