After learning last September that Inland Southern California's two counties and a dozen of its cities would get more than $133 million in federal funds to stop foreclosure blight, local officials envisioned buying foreclosed houses in bulk and at deep discounts.

A year later, many of the local governments, unable to compete with other homebuyers, have bought few or no bank-owned houses.

Some local government agencies, confronted with the need to spend their grants or lose them, are concentrating more on other purposes allowed by the federal guidelines enforced by the Department of Housing and Urban Development.

Those include providing financial assistance for low- to moderate-income buyers of foreclosed houses and purchasing multifamily housing to refurbish and rent to very low-income families.

Cities also are turning to a trust formed by nonprofit housing organizations that will give them a chance to buy bank-owned single-family homes before they are listed for sale to the public.

A central goal of the national Neighborhood Stabilization Program was to enable local governments to buy, fix up and resell houses that otherwise would sit vacant, attracting vandalism and crime.

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Silvia Flores / The Press-Enterprise

Corona city housing manager Jesus Morales shows off the first property funded by the city's Neighborhood Stabilization Program. Money from the federal government is intended to help get foreclosed homes into the hands of new owners.

Early in the foreclosure crisis, government leaders in Riverside and San Bernardino counties said they wanted to do whatever they could to get ahead of investors like those that caused neighborhoods to deteriorate during the recession of the early '90s by converting streets of owner-occupied houses into rentals.

"We found that properties turned from ownership to rental seemingly overnight," said Carey Jenkins, the city of San Bernardino's director of housing and community development, recalling the city's experience in the last downturn.

But the housing market changed drastically while cities and counties crafted their plans and built teams of real estate and development experts.

Although funding contracts were approved by the Department of Housing and Urban Development in March, many local government agencies weren't ready until July or later to start shopping for real estate. Since then they have been routinely losing out to investors willing to pay cash for even the most dilapidated foreclosed houses.

"We are having a real difficult time having offers accepted," said Jesus Morales in Corona's redevelopment agency. Corona, which can use $3.6 million in federal funds, has so far managed to spend $145,000 to buy one house, Morales said.

Fewer houses available

Local governments face a shrunken supply of foreclosed properties for sale. Banks say they are trying to prevent foreclosures by modifying mortgages.

But local agencies say banks are withholding from the market some of the homes they have repossessed, intending to drive up demand -- and prices -- for what is available.

"As of July 31, there were 661 bank-owned properties in Chino, and only about half were listed for sale," said Chino housing programs manager Chris Korbin.

Redlands-based economist John Husing said investors lured to the Inland region by price-slashed foreclosures are much more nimble in striking deals with banks than government agencies hobbled by program guidelines.

With foreclosed properties drawing as many as 70 offers apiece, some people question whether government intervention still is critical.

"We don't need municipalities to absorb the inventory. We need more homes to sell," said James Monks, sales manager for Prudential California Realty in Riverside.

Some housing industry officials predict that municipal purchases of foreclosed houses will become important when the volume of lower-priced foreclosures again outstrips demand. That could happen when banks release their backlog of repossessed houses, they say.

Also, while economists say the worst of the subprime mortgage defaults is over, they expect more foreclosures driven by unemployment and defaults on other adjustable-rate mortgages as they reset higher.

just getting started

Most Inland Southern California cities and counties have barely started their Neighborhood Stabilization programs. Some have yet to close escrow on a house. Several agency officials said they must scramble to meet a September 2010 deadline to prove to HUD they have arranged to spend the grant money.

Still, most of the same local agencies applied last month for a nearly $2 billion second round of Neighborhood Stabilization funding that was part of President Barack Obama's economic recovery package. Winners in the competition will be announced early next year, said HUD spokesman Brian Sullivan.

For now a few municipalities are shelving plans to buy foreclosed single-family houses.

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Kurt Miller / The Press-Enterprise

Mike Duarante fixes up the kitchen of a foreclosed home that the city of Riverside bought and plans to resell.

Ontario has decided to concentrate on buying foreclosed fourplexes it will rehabilitate and turn over to the city housing authority to lease.

Brent Schulz, Ontario's housing and neighborhood revitalization director, said foreclosed single-family houses in the city are being purchased in large part by families who are first-time buyers and plan to live in them. He said the city's code enforcement personnel report that investors who buy fixer uppers are doing a good job of rehabilitation, often putting in new bathrooms, kitchens and flooring before selling them to owner occupants.

In Hesperia, Steve Lantsberger, the city's deputy director of economic development, said late last year Fannie Mae had about 75 foreclosed houses that the city considered purchasing, 10 at a time. But he said before the city was ready to start buying about a month ago, "those properties got gobbled up" by private buyers.

Lantsberger said while the city still wants to buy single-family homes, it shifted emphasis and spent about a third of its $4.59 million to buy vacant foreclosed acreage on the west side of town for a future affordable rental project.

Having flexibility, he said is vital to meeting the HUD deadline for committing money to projects.

Like other Inland Southern California municipalities, Hesperia got a HUD approved grant in early March, from which point it has 18 months to enter contracts to spend its money or lose it. He noted, "We have a ticking clock."

other uses for money

San Bernardino County plans to spend the majority of its $23 million on down payment assistance so low- to moderate-income people can afford to buy foreclosed houses for themselves, said Mitch Slagerman, director of community and housing development for the county.

However, as of Wednesday, no one had bought a foreclosed house with San Bernardino County's help. The problem, say lenders, is that applicants cannot compete successfully against other buyers whose offers don't require government approval and a lengthy escrow.

John Rigler, manager of the Norco branch of Broadview Mortgage, said he has about 20 buyers qualified to buy bank owned homes with down payment assistance from San Bernardino County and Riverside County neighborhood stabilization programs.

"Some have put in 15 or 20 offers, and most times the banks don't even respond to them," Rigler said.

First-time buyers who need to use down payment assistance are at a bigger disadvantage than cities and counties in competing against cash paying investors, lenders say. That is because HUD rules say the condition of the homes they purchase must meet a minimum standard of habitability.

Slagerman said San Bernardino County's program was designed to stimulate buyer demand for a surplus of foreclosed properties that at least temporarily has vanished.

"I don't think anybody anticipated this, not HUD or the other local governments," he said.

Tim Harrison, Broadview Mortgage's branch manager in Upland, said home prices are so low that many first-time buyers do not need the county's financial assistance. He said the federal government's $8,000 first-time buyer tax credit, which expires Nov. 31, sometimes is more than enough to cover the closing costs.

"Sooner or later the prices will go up where there won't be as much competition and then these programs will be valuable," Harrison said.

one hurdle removed

Municipalities report that initially an insurmountable problem with the neighborhood stabilization program was that they were required to buy bank-owned houses at a discount of 15 percent below appraised value. HUD lowered the required discount to 1 percent in mid June.

"There was a myth starting mid to late last year that you could buy (bank-repossessed houses) for 50 cents on the dollar and servicers would be happy to sell them," observed Bank of America Senior Vice President Rob Grossinger.

Grossinger said it is the fiduciary duty of banks to the investor owners of a foreclosed house to "sell the property as quickly and at the highest and best price that we can." Grossinger said Bank of America has established a national system to help cities and counties buy foreclosures. As of a week ago, he said, the bank had sold 44 foreclosed properties to municipalities nationwide, with 30 more in escrow.

Despite the challenges, buying foreclosed single-family houses remains at the heart of most neighborhood stabilization programs.

reselling homes

The houses can be resold to families with income of no more than 120 percent of the region's median, which would be no more than $79,900 for a family of four.

Many cities also plan to acquire and rehabilitate foreclosed rental properties to satisfy a mandate to spend 25 percent of their money on housing for households earning 50 percent or less of the median income, or no more than $33,300 per year for a family of four.

John Dutrey, housing manager for Rialto, said his city could not compete for foreclosed homes on the open market but bought three bank-owned houses with the help of the National Community Stabilization Trust.

Formed by a coalition of nonprofit housing organizations, the trust has a foreclosure clearinghouse where cities and counties can buy repossessed houses before they appear in multiple listings services normally used to market real estate.

first-look trusts

The cities of Riverside, Rialto, Chino and Corona are using the trust's first-look service, and other local agencies plan to join them, said trust president Craig Nickerson.

The trust is "greasing the wheels" for the city of Riverside, said Eva Yakutis, the city's housing and neighborhoods manager.

At first the trust had few houses to offer, Yakutis said, "but about six weeks ago the volume vastly increased from a trickle of one or two a week to double that a day."

Nickerson said during an initial practice period cities are given a limited number of foreclosed houses from which to choose. Also, he said the trust is getting a larger inventory of bank owned houses as more financial institutions participate and offer more of their properties.

Riverside is leading the region in acquisitions, with 20 houses purchased from banks.

Yakutis said that of the $6.6 million in federal funding, Riverside has arranged to spend $1.9 million. The city also has appropriated $5 million in redevelopment funds and received a $20 million bank line of credit to enlarge the program, she said.

Riverside's foreclosure buying strategy is to buy "the worst of the worst ... houses that most buyers could not get a loan to buy" and then rehabilitate them, Yakutis said. Money recovered when the houses are resold, she said, will be reinvested to buy more homes in the most foreclosure-blighted neighborhoods.

Yakutis said the first two houses that the city rehabbed attracted an avalanche of offers in the two weeks they were listed for sale. A four-bedroom house priced at $133,900 got 51 offers, and a three-bedroom house at $125,000 got 12 offers.

The applicants are being screened to see if they are income qualified and pre-approved for financing. Those that pass muster will be considered in the order the offers came in, she said.

Staff writers Leslie Parrilla, Jan Sears, Michael Perrault and Imran Ghori contributed to this report.

Reach Leslie Berkman at 951-368-9423 or lberkman@PE.com