In addition to ratcheting up the number of foreclosures, troubles in the credit market are making it harder for consumers to buy homes.
Home foreclosures jumped nearly 60 percent during the first half of the year, and many of those foreclosed houses are sitting vacant. That's a problem because empty properties soon become unkempt lots that are an eyesore for neighbors, potentially devaluing their properties.
Residents of Chula Vista, Calif., have fought back, passing a law that requires lenders to hire a management company to take care of houses that their borrowers can no longer afford.
Their action comes amid concerns that the number of shabby homes will only escalate as the subprime loan market sinks further into disarray.
President Bush tried Thursday to quell such worries. He said during a news conference that there is enough liquidity in the credit market and that he supports making sure financial institutions have flexibility to help folks refinance homes.
What is more significant to staving off foreclosures, he said, is financial education.
"There needs to be transparency in financial documents. We had Americans sign up for loans, and they may not have understood what they were signing up for," President Bush said. "We've got money in the budget for the financial literacy needed to avoid loan defaults."
Banks, however, are more convinced of a credit crisis.
French bank BNP Paribas said Thursday it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market. The announcement raised the specter of a bigger blow coming to the U.S. credit market — sending the Dow Jones industrial average plunging.
Vacant Homes Easy to Spot
Whether or not there's a crisis, residents of Chula Vista weren't willing to put up with the fallout.
The city of 175,000 has more than 800 homes in foreclosure, and three to five more join the list every day.
Doug Leeper, the code enforcement manager, pulled up to a house with a "For Sale" sign in the front yard — where the grass had given way to weeds and dirt — after getting a report of an open gate and a green pool. Phone books delivered weeks ago sat untouched by the side of the house. In the backyard, a window screen is pulled off, and the abandoned swimming pool is full of green, slimy water.
"I didn't know how many swimming pools we had in a city until we went through a cycle like this, and all the pools go green at the vacant houses, and then we get the calls," Leeper said.
The former police officer said you don't have to be a detective to spot abandoned houses.
"The first thing we see is a dead lawn. Then we'll look further, and there's debris and leaves and things piled around the front door — that means the door hasn't been opened and closed in a while," he said, noting disconnect notices from utility companies.
Leeper said in Chula Vista, many homeowners don't wait around to be evicted but move out as soon as they get their first notice of default.
A lot can go wrong in a vacant house in the months before a lender can resell the property, which is why the law was passed for lenders to take care of vacant property as the buyer defaults.
"I know their bottom line is dollars: spend nothing you don't have to; get everything back you can," Leeper said of lenders.
"However, my bottom line is people: the people who live in that house next door, the people who live behind, the people down the street trying to sell their house but can't because whoever comes to look at their house has to drive past this one and says, 'What the heck's going on here?' " he added.
Being a 'Good Neighbor'
Other cities have taken note of Chula Vista's law and are thinking of copying it.
Virginia Tech Professor Joseph Schilling, co-founder of the National Vacant Properties Campaign, says local governments are worried about the ripple effects of abandoned houses.
"This problem is going to get worse before it gets better, and what's unique is that it's hitting places like Southern California, Denver and Dallas," said Schilling. "For a lot of western cities, this is new territory."
Some lenders already do what Chula Vista requires. Wells Fargo Home Mortgage Senior Vice President Kathy Menchise says the company routinely hires a lawn service for vacant properties and inspects them on a monthly basis.
"Basically we want to be a good neighbor. It keeps the property in better repair; keeps it from deteriorating; keeps our neighbors happy," Menchise said.
Other lenders are not so conscientious. Leeper recalled talking to one lender at an annual meeting.
"They said, 'Doug, what's the minimum we have to do?' And I stood up and pounded my fist on the table and said: 'The minimum? All I want you to do is what you'd want done if it was next door to your house.' "