The landmark housing legislation that became law on Wednesday may have focused on the countless number of American homeowners at risk of foreclosure, but the rescue package also acknowledged the need for triage and help in communities that are dealing with plummeting home values, maintaining vacant properties, and rising crime rates as a result of mounting foreclosures.

Among its many provisions, the Housing and Economic Recovery Act of 2008 authorizes states to issue an additional $11 billion in tax-free municipal bonds for programs such as low-interest loans to first-time home buyers, construction of low-income rental housing, and subprime loan refinancing. The goal? To stabilize ravaged areas before they fall into blight.

“This is undoubtedly the single most important piece of housing legislation we have seen in many years,” said Michael Rubinger, president and CEO of the Local Initiatives Support Corp. (LISC), a nonprofit organizer of public-private neighborhood revitalization efforts. “There is no greater threat to the stability of any community than the escalating impact of boarded-up, vacant properties.”

Nearly 740,000 U.S. properties entered foreclosure during the second quarter of 2008, constituting a 121 percent increase in a year-over-year comparison, according to RealtyTrac.

Federal lawmakers hope the boost in bond financing will complement proactive measures and expand pilot programs that are already underway at state and local levels. Last week, California Governor Arnold Schwarzenegger launched the “Community Stabilization Home Loan Program,” a $200 million initiative which will provide up to 1,000 below-market fixed rate loans to first-time home buyers purchasing foreclosed properties in communities hit hard by the downturn. “This is not for investors or for speculators; this is specifically for people that are really in need of those kinds of homes,” Schwarzenegger said during a launch ceremony, noting that the program seeks to “pump up those areas most in need of economic stimulus.” The program will be funded by tax-exempt bonds.

How best to rejuvenate traumatized communities, however, remains a subject of debate.

According to Congress, part of the answer appears to be sending more money to the front lines. In addition to the bond authorization, the housing rescue package earmarked almost $4 billion in community development block grants for the purchase and rehab of foreclosed properties in distressed neighborhoods. (Block grant programs allocate lump sums of money to states and municipalities, giving them the discretion to disburse funds based on local needs.) Still, it proved to be one of the most controversial components of the housing legislation – one that was derided as a bailout for lenders. President Bush even initially threatened to veto the bill on grounds that the program would encourage lenders to fast-track foreclosures instead of working toward solutions that would allow cash-strapped borrowers to stay in their homes.

Community redevelopment advocates have argued that’s not a likely outcome from the legislation. “No one wins from foreclosure. Both the homeowner and the lender incur significant losses,” said Ali Solis, vice president of public policy and industry relations for Enterprise Community Partners in Columbia, Md. The main priority, she said, is to “stop the cycle of disinvestment that foreclosure brings by recapturing those properties and quickly putting them back to productive use.”

But it’s too early to know whether or not such programs will actually solve the problems exposed by the current housing crisis. “You’ve got a very tight credit market now, so if you’re talking about fixing up and reselling homes, there are not a lot of people who will be able to buy them,” says John McIlwain, senior fellow for housing with the Urban Land Institute. “If I were a for-profit builder, I would be cautious. I wouldn’t want to get stuck with homes I couldn’t sell.”

By some projections, the fate of many at-risk communities could worsen before it improves. The Center for Responsible Lending estimates that some 45 million American homes that are not facing foreclosure will decline in value by $233 billion, with the steepest falls occurring in 2008 and 2009. A similar report released by the Pew Charitable Trusts in April predicted that 40 million neighboring homeowners in the vicinity of foreclosed properties could see their property values and municipal tax bases erode by as much as $356 billion over the next two years. Such depreciation won’t help the inertia of would-be home buyers who are afraid to commit to a contract for fear that today’s neat and tidy neighborhood will turn into tomorrow’s slum. A Zogby poll conducted by the U.S. Conference of Mayors earlier this year found that Americans are more concerned about street crime and neighborhood safety than they are about international terrorism.

“[The block grants] may stop the sickness from spreading but not necessarily cure the cancer,” McIlwain said. “We know that inner cities and outer-edge suburbs are the areas that have been hardest hit by foreclosures. If you are selling foreclosed properties [in the exurbs] to low-income families that are an hour away from their jobs and they have to drive to work using $4-per-gallon gas, what benefit are you really giving them?”

Jenny Sullivan is senior editor, design, at BUILDER magazine.