The growing number of foreclosures has already wiped out several mortgage companies and many families’ financial footholds. Now some observers say it could turn back the clock in some inner-city neighborhoods and moderate-income suburbs that had shown improvement over the past decade.

Although foreclosures are occurring at every income level, they tend to be isolated cases in affluent areas. Neighboring properties tend not to lose value just because somebody down the block got overextended and lost the house. “But when you have four or five foreclosed properties on [one] block, it has an effect,” says Geoff Smith, the research director for the Woodstock Institute, a Chicago-based economic development advocate for low- and moderate-income neighborhoods. “The properties are boarded up, and crime starts to rise.” As a result, property values decline.

For the time being, foreclosures have been concentrated in moderate-income areas, many of them home to African Americans, primarily because that is where the loose lending tended to occur. (In July, the National Community Reinvestment Coalition released a study demonstrating that black homebuyers, even those who are affluent, were more likely to have received high-cost loans than other segments of the population.) The prospect of dense clusters of foreclosures prompts Smith and Michael van Zalingen, the director of homeownership at Neighborhood Housing Services (NHS), to envision a contagious, harmful effect on entire neighborhoods.

The Wall Street Journal published predictions a while back that one in eight subprime loans will be foreclosed upon. “Are you going to have every eighth house empty?” asks van Zalingen. “That’s going to have an impact.”

The NHS, which counsels low- and moderate-income people on how to buy and hold onto a home, has already seen its own version of the foreclosure boom. In the first half of this year, it handled as many calls for counseling on foreclosures as it did in all of 2006. “And that doesn’t count the people who, when they find out we can’t pay their mortgage for them, just hang up the phone,” van Zalingen says.

Both van Zalingen and Smith note that many parts of Chicago’s South and West sides and southern suburbs rode the recent wave of rising home equity and easy borrowing to a better place. As houses, streets, and, indeed, whole blocks improved, crime dropped and neighborhoods began to thrive again. Aggressive gang- and graffiti-control programs and other governmental initiatives helped, but the new wealth that individual homeowners found in their homes-and the personal stake they had in those properties-played a big role.

How much of that will erode? With many observers forecasting a new swarm of foreclosures this fall as billions of dollars worth of adjustable rate mortgages re-set at higher payment levels, van Zalingen and others anticipate a relapse in these improving neighborhoods. Investors may go bargain hunting among the foreclosed homes, buying up swaths of property and holding them empty as they await a market turnaround. “That’s inviting people to come into those places to sell drugs or fight dogs,” van Zalingen says. “People who still own their homes may think, ‘What’s the point of fixing my house up?'”