PROVIDENCE — The new property owners in some neighborhoods here mark their turf with padlocks, plywood and messages such as the one scrawled on a front door in Olneyville: “Copper Gone.”

Vacant houses have always been easy prey for vandals, no less so when the owners are giant banks, companies representing Wall Street investors.

Block by city block, foreclosures are scarring the landscape in neighborhoods such as Olneyville, Elmwood and the West End, raising fears that the deteriorating real-estate market could hurt property values and undermine years of urban redevelopment efforts.

These are the same neighborhoods that have absorbed tens of millions of dollars in city and state tax incentives to transform vacant mills into loft apartments, restore neglected Victorians and open restaurants.

These neighborhoods also became magnets for real-estate speculators who bought up houses and then resold them for twice what they’d paid.

Now, house prices are down and the speculators are gone, leaving behind vacant properties and “For Sale” signs.

Rhode Island’s foreclosure rate during the second quarter of this year was the highest in New England and above the national average, according to the Federal Reserve Bank of Boston.

On average, 8 out of every 1,000 mortgages in Rhode Island fell into foreclosure during the second quarter, according to data from the Mortgage Bankers Association. That is four times the foreclosure rate of 2 per 1,000 mortgages in the second quarter of 1991, during the state banking crisis. Driving up foreclosure rates in Rhode Island and around the country are “subprime” mortgages, typically offered to borrowers with spotty credit. These high-cost loans have shown up in large concentrations in poorer communities and former industrial cities such as Providence, said Patrick Newport, an economist who specializes in housing at Global Insight in Lexington, Mass.

Foreclosures on subprime loans in Rhode Island during April, May and June soared to 37 foreclosures for every 1,000 mortgages, according to the mortgage bankers’ data.

The fallout has hit especially hard in Providence, where about 500 mortgages fell into foreclosure as of June, and another 500 were 90 days or more delinquent, according to data from LoanPerformance of San Francisco, a division of First American Core Logic Inc. Mortgage lenders generally begin foreclosure proceedings if payments are three months late.

Providence Mayor David N. Cicilline has warned that foreclosures in the city have reached the level of a “crisis” that could spread to other communities.

“The success of Rhode Island as a state,” Cicilline said before a packed state housing board meeting in August, “is inextricably linked to the health of the capital city.”

JUST A FEW years ago, property owners in Providence watched their home values climb like stocks during the tech boom. In 2003, house prices in the Providence metro area spiked 22 percent, ranking it among the top five metro areas in the country for price appreciation, according to the National Association of Realtors.

The real-estate boom, coupled with generous tax credits helped attract big developers such as Baltimore-based Streuver Bros, Eccles & Rouse to more than $500 million since its arrival three years ago, including renovating the vacant American Locomotive Works site to build rental housing on Valley Street in Olneyville.

Even two- and three-family houses on streets with crumbling sidewalks were snapped up by speculators.

In January 2004, the listing for 25 Steere Ave. read: “BEAUTIFUL HOME WITH VINYL SIDED AND PRIVATE YARD. FINISHED BASEMENT WITH SEPARATE ENTRANCE. THIS IS A MUST SEE.”

The house at 25 Steere Ave. sold that April for $150,000, according to city tax records. The new owner resold the house 1 year and 5 months later for $240,000.

But by the fall of 2005, the real-estate market was cooling. Price appreciations in the Providence area that spring had slowed to about 6 percent, the national data shows.

Two years later, the house at 25 Steere Ave. is boarded up. The lender has foreclosed. City records list the current property owner as Deutsche Bank. The list price has dropped to $134,900.

“It was a lot better before it got ransacked,” said the property’s former listing agent, Steve Gillikin, of RE/MAX New Horizons.

Thieves smashed the windows and ripped out the copper pipes. After the second break-in, Gillikin said, he scribbled “Copper gone” on the door.

The broker listing now reads: “This property has a lot of potential. Priced to sell AS IS condition. Copper missing. Other work needed … Will need rehab loan, private financing or cash.”

“Right now the only buyer for this house is gonna be a cash buyer or investor, and quite frankly that kind of buyer is looking for a big discount these days,” Gillikin said. Deutsche Bank, he said, would “be lucky if they got $100,000 for it.”

During the run-up in real-estate prices, lenders gave out mortgages to just about anyone, it seemed, who could sign their name. Speculators bought houses at inflated prices, Gillikin said, and then milked them for rent money.

THEN HOUSE PRICES stopped rising. The rental market softened. And borrowers were saddled with properties that didn’t generate enough rent to make their mortgage payments. Owners who couldn’t sell their houses for enough to pay off their mortgages fell into foreclosure.

“I’m very concerned [about] the impact it’s having on the values in these neighborhoods,” said West Elmwood Housing Development Corporation’s executive director, Sharon Conard-Wells. “And that’s not just in the West End. It’s South Side. It’s Silver Lake. It’s Union Avenue.”

Back in 1991 when Conard-Wells became executive director of the not-for-profit community development corporation, the state was mired in a banking crisis and a recession. “I’m not going to say it’s that bad yet,” she said, “but when you see this many for sale signs, vacant units and boarded units and you hear the industry all over the news saying the worst has not come yet ... that’s scary.”

Housing experts say foreclosures can trigger a downward spiral in a neighborhood. One study often cited by economists found that every foreclosure, on average, reduces the value of single-family houses within an eighth of a mile by 1 percent to 1.4 percent. (The study, by housing analysts Geoff Smith and Daniel Immergluck, examined the impact of foreclosures on property values in Chicago from 1997 to 1998. By that measure, the value of a $300,000 house could decline by $3,000 to $4,200.)

“Typically, foreclosures and defaults don’t affect the market much until they [reach] 8 or 10 percent,” said Christopher Cagan, director of research and analytics at First American Core Logic. “But when you get to the point where defaults are taking 8 or 10 percent of the market … the lender will discount price 15 or 20 percent just to get rid of it.”

The Mortgage Bankers Association reports the statewide foreclosure rate during the second quarter was less than 1 percent, but state housing officials say that neighborhood foreclosure rates can run much higher.

For example, in the city’s Olneyville section, state housing officials estimate the foreclosure rate is closer to 9 percent. (The rate is calculated based on the number of foreclosure sale ads as a share of total owner-occupied units in the neighborhood. The number is at best an estimate, however, since not all houses advertised for foreclosure actually wind up being foreclosed upon.)

The potential for further deterioration in Olneyville’s housing stock worries people like Frank Shea, executive director of the nonprofit Olneyville Housing Corp. Shea recently pointed to a boarded-up multi-family house on Julian Street, a stone’s throw from about $5 million worth of housing the corporation has built with grants and tax credits during the last five years.

Last month, the Olneyville Housing Corp. completed the first half of a $4.1-million project to restore the burned out Riverside Mills Complex to house a 20-unit residential development as part of a drive to improve affordable housing in the area. Funding for the project included $860,000 from the City of Providence.

“This has the potential to undo 10 years of blood, sweat and tears on the community’s behalf,” Shea said recently as he led a reporter on a tour of the neighborhood. “The real-estate market in this area was so hot, this neighborhood saw 350-percent price increases. But if that’s [driven by] speculation without value and home ownership, it’s devastating for the neighborhood.”

THE EVOLUTION of the city’s West End rarely garners much attention in promotional brochures touting The Renaissance City, but to people who have lived there during the last 10 years, the changes are striking.

In the commercial area along Westminster Street, about a mile from downtown, formerly vacant storefronts now house boutiques and a Greenwich Village-style diner where the menu includes “Little Italy Omelets” and sun-dried tomatoes.

The Classic CafÉ’s owner, Ray Burns, opened the restaurant five years ago. “Everybody thought we were completely insane,” recalled Burns. “This was a burned-out shell.”

He probably would not have been able to make it work if it weren’t for the fact that the house Burns and his wife bought in the West End about seven years ago had appreciated handsomely.

“We mortgaged our house twice,” Burns said, “once to get [the cafÉ] open and the second time to stay open.”

The first two years, he said, the restaurant didn’t make any money. Now, on Sunday mornings people line up outside its doors.

Yet, the deteriorating house market is encroaching on the West End too, on city blocks where homeowners have renovated Victorians and planted gardens. On Whitmarsh Street, where Burns and his family live, two houses have been advertised for foreclosure auction and several others bear “For Sale” signs.

Less than half a mile away on Ford Street, where rented double- and triple-deckers outnumber single-family houses, Nancy Skipworth has watched as one property after another has been boarded up. Six houses have been advertised for foreclosure in the last 12 months. One belonged to her next-door neighbor. She heard that he went back to the Dominican Republic. His mailbox overflows.

“It seems a shame,” said Skipworth, who is 71 and has owned her house for 28 years. “A lot of people come here and most of them are not [native-born] Americans, and they give them a deal and they take it. And they find out it’s not a great deal.”

Mark Van Noppen, managing director of The Armory Revival Co. in Providence, which has invested heavily in restoring properties in the city’s West End, said, “The worst thing about this mortgage crisis is the personal cost to those individuals and families losing their savings, their credit and their homes.”

But the economic impact of the credit turmoil “doesn’t even begin to compare” with the banking crisis and the recession during the early 1990s, Van Noppen said, when home values plummeted, the housing stock deteriorated, and property owners who had lived in the neighborhood fled.

“The neighborhoods are much more solid than they were a few years ago,” Van Noppen said. “In most of our city, if one lives six blocks from a cluster of four or five foreclosures, that cluster does not particularly represent a threat because most of the neighborhoods of the city are relatively stable. So for big sections of the city, this crisis is not a neighborhood crisis.”

Crisis or not, the “For Sale” signs multiply. The number of houses on the market in August climbed to a 10-month supply, compared with a less than 6-month supply in August of 2005, according to the Statewide Multiple Listing Service.

On Daboll Street, in the city’s West End, Gaensly Luceus and his wife, Erika, put their house on the market in July for $350,000.

“A couple of years ago, there were people knocking on my door trying to buy my house,” Luceus said. But the summer passed without a single offer. So last month, they took it off the market.

Just up the block, three houses are boarded up.

The couple, who both work at a bank, still plan to sell their house. They want to move to a safer neighborhood, Luceus said, so their three children can play outside. He has his eye on the suburbs.

“Barrington or Lincoln.”

PROBLEM LOANS

An estimated 7.1 percent of the home mortgages in Providence are not being paid on time,

according to an analysis by

LoanPerformance of San Francisco. Its database covers about 80 percent of the market. From those numbers, the analysts estimated the performance of all mortgages for the entire city.

Total mortgages 42,185

Current with payments 39,176

Pct. not current 7.1%

Number delinquent

30 days 1,223

60 days 443

90+ days 504

Number in bankruptcy 105

Number in foreclosure 488

Foreclosed and in bankruptcy 19

Now owned by mortgagor 236

SOURCE: LoanPerformance, a division of First American Core Logic Inc.

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