Property values will decline by $1.2 trillion in 2008, denting consumer spending, property tax revenues, job creation and economic growth, according to an economic impact report released today by the U.S. Conference of Mayors.

Meeting in Detroit — one of the cities hit hardest by foreclosures — the group said that weaker market demand and large inventories of homes for sale would have reduced home values by $676 billion in 2008. With the added impact of the foreclosure and mortgage crisis, home values are projected to fall an additional $519 billion, the report said.

The U.S. Conference of Mayors said the report, prepared by Global Insight Inc., demonstrates the need for lenders to modify loan terms of borrowers who have the ability to pay if they had not been placed in risky adjustable-rate mortgages.

The Mortgage Bankers Association maintains that economic issues like unemployment — not risky loans — are the primary driver of foreclosures in “rust belt” states like Indiana, Ohio and Michigan.

California, Florida, Nevada and Arizona — states where speculators were particularly active — have more than a third of the nation’s subprime adjustable-rate mortgages (ARMs), and accounted for most of the increase in foreclosures nationwide during the second quarter, the MBA says.

Detroit Mayor Kwame Kilpatrick acknowledges that economic issues are a factor in foreclosures in Michigan and other Midwestern states that are dependent on manufacturing. But that doesn’t mean lenders are off the hook.

“Over the last decade, we lost over 300,000 jobs — that’s an issue we can’t run from,” Kilpatrick said. “But in no way can you subtract or diminish at all the role of the mortgage bankers and lenders” in the current rise in foreclosures.

Some lenders have “preyed on” Detroit’s minority working-class neighborhoods for years, he said, with subprime loans comprising 52 percent of mortgage loans made to African Americans.

But Kilpatrick said he was pleased that lenders are participating in the U.S. Conference of Mayors meeting in Detroit, listening to mayors’ concerns about improving communication with city officials, maintaining foreclosed properties, and restructuring the terms of loans for borrowers facing foreclosure.

“On the positive side, the mortgage bankers are here, the lenders are here, working on these three fronts,” Kilpatrick said.

The report also called for organized ad campaigns to inform borrowers about counseling services to modify loans, more counselors for borrowers, expanding Federal Housing Administration loan guarantee programs to help more borrowers, and legislation to end predatory lending and prevent loan abuses in the future.

Kilpatrick said another goal of the meeting is to “change the face that’s been put on the foreclosure problem.” With foreclosures now a commonplace event in communities across the U.S., Americans are realizing that the problem is not confined to urban areas, or the result of “deadbeats who don’t pay bills,” he said.

Detroit has built more housing in the last five years than it did in the last 50, including 1,000 new downtown lofts and the city is working to diversify its economy to be less dependent on manufacturing, Kilpatrick said. The rise in foreclosures threatens such efforts.

“We’ve been rushing to diversify, and the thing that allowed us to do that was the middle class tax base,” Kilpatrick said. “If we have a breakdown in that, it undermines the transformation we’ve been making. We could lose all the momentum we’ve built if we don’t get our arms around the foreclosure problem.”

The Global Insight report prepared for the U.S. Conference of Mayors projects a potential loss of $6.6 billion in tax revenue in 10 states, with the upswing in foreclosures slowing economic growth below 2 percent in 128 metro areas.

Home-price declines across the U.S. are projected at 7 percent in 2008, and as high as 16 percent in California. The states taking the biggest hits on property tax revenue are projected to be California (-$2.95 billion), New York (-$686 million), Florida (-$589 million), Illinois (-$329 million), Massachusetts (-$223 million), Arizona (-$158 million), Georgia (-$134 million), Michigan (-$111 million), Nevada (-$49 million) and Minnesota (-$20 million).

The report projects that nationwide, the economy will grow at a rate of 1.9 percent in 2008, a percentage point lower than without the rise in foreclosures, and that consumer spending will grow by just 2 percent, despite a projected 3.1 percent gain in incomes.

Lauderhill, Fla., Mayor Richard Kaplan said that in Florida, home buyers must contend not only with the credit crunch, but also with high insurance premiums and property taxes.

Although Kaplan said property taxes in Florida compare favorably to the nation as a whole, limits restricting assessments from rising more than 3 percent a year create inequalities and disincentives for longtime homeowners to sell their current home in order to buy one better suited to their current lifestyle.

Kaplan said that like Detroit, Lauderhill — a mostly built-out, working-class city that’s 70 percent minority — has been working to transform itself. “It was a city potentially on the decline,” Kaplan said, before voters approved a $35 million general obligation bond that’s helped fund redevelopment.

Kaplan said the city has programs that help build affordable housing, provide second mortgages, and fund home repairs.

If lenders would work more closely with the city’s housing board, it might be able to help troubled homeowners secure funding, or find occupants for properties that have been foreclosed, he said. The city recently bought a deteriorating eight-unit townhouse project and is selling the units as condominiums, he said.

Kaplan is concerned that unoccupied, foreclosed homes won’t be property maintained.

“We do have houses in our city not being maintained, although not a lot of them yet,” he said. “We’re being told the peak of the subprime issues is May of next year, so we haven’t seen the bottom yet.”

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