How far can the City of Riverside extend $6 million in federal aid for cleaning up the foreclosure mess?

Before tackling that question, please review the following numbers, all of which are big: As of October 2008, more than 2.5 million households in the U.S. were either in foreclosure or somewhere along the way, a 72% increase above the year-earlier level, according to, an investment website. The total value of what lenders call REOs (for "real estate owned" by banks) is anybody's guess, but it's safe to peg it somewhere north of $100 billion. (Remember when a $1 billion seemed like a lot of money? Now it seems barely enough to buy a carton of milk at the school cafeteria.)

If the financial cost of the foreclosure avalanche is high, however, the social cost seems no less overarching. In many working-class neighborhoods, where foreclosure activity tends to predominate, the number of abandoned properties on some blocks threatens to outnumber homes that remain occupied. As a consequence, even non-foreclosed homes lose much of their value and become nearly unsellable while vacant homes become nests for squatters or gangs or both.

The so-called Inland Empire, which is the marketing name for Riverside and San Bernardino counties, is reporting one of the highest foreclosures rates in the country. In cities such as Perris and Hemet, foreclosures represent up to 15% of all single-single-family homes. The mortgage default rate in the City of Riverside is not as severe, yet 3,688 homes became REOs from July 2007 through November 2008, according to city officials.

In October, Congress finally responded by enacting the $15 billion Neighborhood Stabilization Act of 2008, authored by a group led by Rep. Maxine Waters (D-Los Angeles). HUD's Neighborhood Stabilization Program, created to disburse the money, is budgeted with only $3.92 billion, for some reason. The intent of the bill is to enable local government to buy foreclosed homes and resell them as quickly as possible to new owners, rather than let the homes become social hazards and eyesores. At least 25% of those units (both single-family and multi-family) must be sold or rented to low- and low very-income households. As a whole, Riverside County is set to receive $48 million for neighborhood stabilization.

Some communities have balked at the idea of government getting involved in the business of buying and selling homes, viewing the practice as an unwelcome intrusion on free enterprise, or as tying up precious cash in white-elephant real estate at a time when local government is cash-poor. The slow recovery of the mortgage market combined with the calamitous growth in foreclosures arguably trumps both those contentions, however.

Like much recent Congressional legislation, the statute is an emergency measure: Under HUD rules, local governments had only 45 days to put their plans together, with a deadline of December 5, so they can receive funds by mid-January.

Riverside, a city of nearly 300,000 people, responded as quickly as any municipality in the country, according to the city's housing program manager, Jim Yerdon, who wrote the city's foreclosure aid plan. In less than four weeks, "we held a public hearing, drafted the plan, held another public hearing on the draft, got the plan approved by the City Council and submitted the plan to HUD on Election Day, a month before the official deadline," he said. "I think we were the first in the country to finish."

Beyond speed of preparation, flexibility may be the most notable aspect of Riverside's foreclosure-aid plan. The plan says the city is ready to participate in nearly every category of housing rescue listed by HUD – including rehabilitation, readying properties for sale to homeowners, and even demolishing properties that are too far gone and selling the land to Habitat for Humanity, the volunteer home building group. The only category that Riverside did not sign up for is new construction. "There's just no market for it," Yerdon said.

To assist low-income families to buy homes, the city plans to set up a lease-purchase structure, by which households initially pay monthly rent. The city sets aside at least 5% of the rents into an escrow account to be applied toward a future purchase. To stretch the city's thin supply of foreclosure-aid dollars, the city plans to ask lenders of some foreclosed properties, when possible, to "carry back the note" while the city looks for a new buyer. In other words, the city wants the bank to provide a new mortgage for the city as homeowner. It's cheaper, after all, for the city to pay a monthly mortgage than buy a property outright for cash. The city plans to assist households earning less than $35,000 a year, for whom home ownership is untenable, by converting multi-family foreclosures into affordable rentals.

Nobody, including Yerdon, pretends that $6 million is enough to cure the foreclosure problems of Riverside. "It's a drop in the proverbial bucket, but a start in the right direction," he said. One best-case result, he said, would be to "stabilize the neighborhoods that are near the tipping point," because foreclosures could overwhelm the local housing inventory.

Given its limitations, what is Yerdon's view of the HUD program? "I'm completely impressed by HUD," said the Riverside official, who worked as a real estate agent for six years before entering government. The federal housing agency, he added, took "a very difficultly written piece of legislation and made it workable."

This statement may startle some readers, especially affordable-housing advocates who have long viewed the federal housing agency as a tangle of  red tape and inefficiency. Hearing the federal agency praised for effectiveness may strike their ears as oddly as hearing defense contractors being applauded for thrift. So be it.

If the Neighborhood Stabilization Act is not enough to cure the foreclosure problems in Riverside or elsewhere, at least HUD was able to move quickly while allowing local government enough flexibility to get the maximum benefit from limited dollars. Until the next ship comes in, Riverside's version of neighborhood stabilization looks seaworthy enough.