The Foreclosure Relief Act currently before Congress contains a Neighborhood Stabilization proposal which addresses a piece of the foreclosure crisis that has not received much attention: the tens of thousands of vacant houses, called REOs, that threaten otherwise sound working- and middle-class neighborhoods. The bill includes a $4 billion appropriation to help state and local jurisdictions address these vacant houses. Not all the legislators are enamored of this provision.

A concentration of REOs which sit abandoned and subject to vandalism is not healthy for a neighborhood. Bankers like to remind us they are not in the real estate business. What usually happens is that eventually these REOs are sold to investor-owners rather than homeowners. Some investor-owners do the right thing but most fall into two categories: those who slap some cheap paint and carpeting on the houses and re-sell them to unsophisticated buyers, and those who slap on some cheap paint and carpeting and convert the houses to rental units, often Section 8 units. Neither of these actions bodes well for neighborhoods which are often fragile themselves.

The previous foreclosure crisis in Baltimore around 2000 involved FHA-insured loans, since at that time FHA controlled 40 percent of the Baltimore market. This market share fell to below 3 percent by 2003. Because of the high numbers and concentrations of FHA REOs in 2000, FHA instituted a "neighborhood stabilization" program which assured that many of their REOs were renovated beautifully and re-sold to first-time homeowners. The St. Ambrose Housing Aid Center was one of dozens of nonprofits across the nation that participated in the program.

Between 2000 and 2008 St. Ambrose bought, renovated and re-sold 210 FHA REOs in Belair-Edison, Northwood, Ramblewood, Chinquapin Park, Waltherson and several other neighborhoods, primarily in Northeast Baltimore. Many of these homes were purchased by teachers and police officers.

By 2002 FHA, having tightened its regulations, was replaced by a new generation of untested loan products: interest-only loans, adjustable-rate loans (ARMS), 80-20s (or two loans for one purchase) and what are commonly known as "liar" loans, where lenders accepted the borrower’s word on his or her income and job security. These are the loans that are now in default and threatening so many families and neighborhoods, and there is nothing equivalent to FHA’s "stabilization program."

This is the reason why the $4 billion appropriation in the current Foreclosure Relief Act before Congress to help states and cities stabilize their neighborhoods is so critical.

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