The hills around this city have seen plenty of construction, often the distinctive red-roofed homes favored by Israeli settlers.

But the bulldozers and laborers active here recently are laying foundations and building roads for a different type of development -- planned communities targeted to middle-income Palestinians, including one billed as the first "new city" for Palestinians in modern memory.

These communities are patterned after American suburban development -- the new city, Rawabi, is specifically designed for upwardly mobile families of a sort that in the United States might gravitate to places such as Reston, Va. The developments are also relying on another American import, the home mortgage, including creation of a Fannie Mae-style institution for the West Bank.

Though Israeli-Palestinian peace talks have stalled, Palestinian officials have put a focus on building the institutions of a future state, including their banking system and economy. Backed by the U.S. Overseas Private Investment Corp. (OPIC) and the nonprofit Middle East Investment Initiative, whose board is heavy with Washington insiders, a half-billion-dollar fund is being set up to expand a mortgage market that at present serves mainly the wealthy, or at least those who can afford 13 percent interest and the risk of quarterly rate resets.

OPIC is putting up about half the money. The Palestinian Authority, through its Palestine Investment Fund, the International Finance Corp. and two local banks, are contributing the rest.

The Middle East Investment Initiative, which has close ties to the Aspen Institute and the DLA Piper law firm from which U.S. peace envoy George J. Mitchell recently retired as chairman, is helping set up a company that will administer the fund. The company, Affordable Mortgage and Loan -- the acronym means "hope" in Arabic -- will approve underwriting standards that are to be used by local banks and contribute 70 percent of a home's purchase price in the form of 25-year loans. Rates are to be tied to U.S. Treasury bonds.
U.S.-style state support

Though the Fannie Mae analogy these days causes groans, it is apt. The new company's purpose is to keep the mortgage market liquid and give banks the confidence to extend credit on terms that middle-income families can afford.

Those involved, including former secretary of state Madeleine K. Albright, former Fannie Mae board member Ann Korologos and Jim Pickup, a partner at DLA Piper and counsel to the Aspen Institute, see a broad social aim -- building a Palestinian middle class that will have a direct financial stake in the economic and political success of a future state.

The Middle East Investment Initiative is also overseeing an OPIC-funded program that guarantees loans to small businesses in the West Bank. About $40 million in loans to 160 businesses has been approved. The Middle East Investment Initiative is studying plans to extend the program to businesses in the Gaza Strip, though it has had difficulty determining how to do so while also guaranteeing that it does not help entrepreneurs who are involved in smuggling or have ties to the Islamist Hamas movement that runs the territory.

The mortgage program, however, is seen as potentially revolutionary for an economy that is short on housing and constricted by ultra-conservative banking practices.

The lack of affordable long-term lending means that adults, including newlyweds, often must stay with relatives while they save the money to pay cash for a home, or move into half-finished flats that are then completed bit by bit. It is a time-consuming process that, in turn, constrains development of the home-construction industry, while banks hoard deposits that with proper safeguards could be earning a profit.

"Buying a home is a game changer," said George Salem, a DLA Piper adviser who is helping raise about half a million dollars from private investors to fund Affordable Mortgage and Loan's initial operating costs. There is the prospect of a return on that investment, as homebuyers begin repaying their loans. But it is years down the road, he said.

"This is a contribution to help develop Palestine," Salem said.
Building hope

Two new developments are counting on the new mortgage program for their own success. The Palestine Investment Fund's 2,000-unit Al-Reehan project is already underway, with model homes rising on a West Bank hilltop that, on a clear day, offers a glimpse of the Mediterranean.

"Even if the political horizon is uninspiring, this gives people hope and reason to stay the course," said the fund's chairman, Mohammad Mustafa, referring to the stalemate between Israelis and Palestinians in restarting peace talks.

More ambitious is Rawabi, the planned city north of Ramallah that is intended for 40,000 people. The development company has brought in U.S. consultants to give the place the feel of a suburban town center, with rings of homes around a core of stores, schools, hospitals, clinics and entertainment facilities.

Developer Basher Masri said that instead of the helter-skelter sprawl of cities such as Ramallah and Nablus, he envisages a style that will attract the career class of an increasingly urbanized society.

The project has been delayed by tangles with both the Israeli and Palestinian bureaucracies. Masri is waiting on Israel's Defense Ministry to approve a needed road in an area under its control and for the Palestinian Authority to approve some infrastructure and make provisions for a water supply.

However, the fact that it is here at all is significant. Masri's company has done projects in Morocco and elsewhere but only recently judged the security situation in the West Bank stable enough to invest and to bring along backers that include the government of Qatar.

After seeing businesses collapse or barely sustain themselves through years of intifada and violence, he said, "We thought it was time."