Banking Crisis: Money-Spinning Scam for the Financial Giants

Targeted Communities Get First Dibs to Buy Foreclosed Properties

September 4, 2010

Walletpop - File this story under "ironic."

Lots of taxpayers bought homes they couldn't afford. So they lost their homes. Cities -- meaning taxpayers -- are now going to buy those foreclosed homes. Sound goofy? It's for real.

The U.S. Department of Housing and Urban Development has announced the launch of a new program called First Look, in which banks will give state and local governments and nonprofit organizations a first shot at buying foreclosed properties.

Under the program, communities will get 48 hours' advance notice to buy the distressed properties at a 1% discount, according to HUD. The program's goal is to boost the $7 billion Neighborhood Stabilization Program which, as part of the Housing and Economic Recovery Act of 2008, provided grants to some local governments to purchase and redevelop distressed properties.

About 100,000 homes could be sold nationally in areas targeted by HUD.

"This groundbreaking agreement will help rebuild neighborhoods that have been struggling with blight and declining home values due to foreclosures," HUD Secretary Shaun Donovan said in his announcement. "...[It] helps us level the playing field to give communities a better chance to stabilize these neighborhoods."

Abandoned homes that languish too long drag down neighborhood home values; recently foreclosed homes are less likely to, data show.

Why do cities need a leg up on purchasing foreclosed homes? Professional investors (some with cash to burn) have been swarming communities well-stocked with foreclosed properties, buying the homes and quickly flipping them. They accounted for about one-fifth of all home sales in July, according to the according to the National Assn. of Realtors.

The speed with which investors snatch up the homes has resulted in two outcomes: some flippers barely improve the properties, thereby keeping the home values in those neighborhoods low; and the speed with which they buy up properties has kept cities, working at a more lumbering pace, out of the neighborhood-improvement business. Once cities do undertake that business, many have pledged to turn the new properties "green" and help lower-income families get into them.

What's in it for the lenders? Those participating in First Look, including Wells Fargo, Bank of America, Freddie Mac, Chase and Citibank, will get reliable buyers that probably will pay market price for the homes. And the lenders still get to keep the lion's share of their foreclosed inventory to sell as they please.

The cities face a hitch, though: 143 communities participating in the federal program have less than a month to spend their funds. If they fail to do so in a timely manner, HUD will freeze the unused funds. Good luck with that.