(Bloomberg) — Pittsburgh Mayor Luke Ravenstahl said the city will buy back tax liens from bond insurer MBIA Inc. that were used as collateral for debt securities and have been blamed for holding up redevelopment of the city’s most blighted areas.Pittsburgh will pay $6.5 million for the liens on about 11,000 derelict properties, according to an e-mailed press release from the mayor’s office. Armonk, New York-based MBIA controls about three quarters of all real estate with tax liens in Pittsburgh, and nothing could be done to improve the properties until the bills were paid or MBIA wrote them off.

“Our neighbourhoods can no longer be neglected.” Ravenstahl said in a statement. “Now, properties in our city’s neighborhoods, previously unavailable for re-development because of their high tax-liens, can finally be developed.”

The Pittsburgh Tribune-Review this week quoted Ravenstahl as saying he would announce “good news” about the liens today. A lien is a claim against a property. Pittsburgh Public Schools and the Pittsburgh Water and Sewer Authority will join with the city in paying for the liens.

Michael Ballinger, an MBIA spokesman, declined to comment immediately. In a statement, MBIA Managing Director Mitchell Sonkin said the company is “pleased” with the agreement. Shares of MBIA fell 37 cents to $69.33 on the New York Stock Exchange. They are up 15 percent this year.

MBIA controls about 8 percent of the land in the city and uses the liens as collateral for almost $200 million of bonds that mature in 2008, according to company data and the Pittsburgh Neighborhood and Community Information System, a project partially supported by Carnegie Mellon University and the Heinz Endowment.

On an April conference call with analysts and investors, then MBIA Chief Financial Officer Nicholas Ferreri said the company expected to collect about $40 million on the liens, based on its “best case of what the potential loss can be,” even though in many cases the value of the real estate had fallen below the amount of taxes that were due.

Bloomberg News two weeks ago shed light on the liens by showing that many of the properties with overdue taxes had become derelict. At least one, an abandoned three-story row house at 217 Dinwiddie Street in a section of the city that inspired the 1980s police drama Hill Street Blues, was being used as a gathering place for people to smoke crack, neighbours say.

“This will allow the city to easily recycle abandoned properties that have been tied up in this process for years,” said Kendall Pelling, planning and acquisition coordinator for East Liberty Development, a non-profit group that builds affordable housing in the city.

Pittsburgh is paying about market value for the liens, a switch from the past when it typically reimbursed MBIA for what the company paid for the liens plus accrued interest, he said.

“The city has had to pay a substantial amount of money for bad liens,” Pelling said. “They have spent $20,000 to buy back vacant lots.”

MBIA’s main business is selling insurance to municipal borrowers. The company, the biggest in the industry, has insured more than 90,000 bonds against default since it went public in 1986. It covers $900 billion in principal and interest on more than 30,000 fixed-income assets.

MBIA got into tax liens in 1996 by acquiring 50 percent of West Palm Beach, Florida-based Capital Asset Research Corp. for $16 million. Capital Asset purchased liens from local governments, paying cash for the right to try to collect overdue taxes and levy finance charges in communities from Arizona to Florida. By 1999, MBIA owned a majority stake in the company.

Capital Asset bought $64 million of tax liens in Pittsburgh and agreed to buy three years of additional delinquent taxes in the city, whose population fell to 334,563 in 2000 from 671,659 in 1940, according to data provided by Sustainable Pittsburgh, a public policy advocacy group.

Recovering back taxes became more difficult after July 29, 1999, when the US District Court for the Western District of Pennsylvania issued an opinion in a lawsuit brought by Pittsburgh homeowners. The court said Capital Asset was charging about twice the state-mandated cap of 10 percent interest on back taxes. Five days later MBIA said it would shut Capital Asset, calling the investment “an expensive lesson in how not to expand our business” and taking a $102 million charge.

Court documents show that on August 19, MBIA created a shell company named Caulis Negris, a flawed Latin translation for “Black Hole,” to sell one final set of bonds backed in part by the Pittsburgh liens, some of the last held by Capital Asset.

Caulis Negris owns the liens that are the collateral for the bonds that MBIA insured. The more money Caulis Negris gets from the liens, the less MBIA has to pay bondholders. MBIA has set aside $77 million in reserves to cover shortfalls on the Black Hole bonds since 1999, Securities and Exchange Commission filings show.

MBIA’s ability to collect in Pittsburgh was reduced again in 2003 when the same court ordered the company to lower its rates and fees and refund money to some property owners, according to Aggie Brose, deputy director of Bloomfield-Garfield Corp., a builder of affordable housing in the city. MBIA has held up development by not writing off its investment and allowing foreclosures, said Adriane Aul, who heads the Pittsburgh Community Reinvestment Group’s efforts to deal with vacant properties in the city. An aging population and the loss of manufacturing jobs left about 20,000 abandoned houses and vacant lots across the city, almost 20 percent of all residential property, according to the Pittsburgh Neighborhood and Community Information System.

Property tax values fell 10 percent between 2003 and 2005, according to an October 6 Moody’s Investors Service report.