My thoughts on the so-called "Big Surprise" about north Minneapolis foreclosures

Big surprise behind some city foreclosures

A study has revealed that many foreclosures in the North Side, the area hardest hit in Minneapolis, occurred before interest rates jumped.

By Steve Brandt, Star Tribune

There's some surprising news in a study of foreclosures in north Minneapolis, the epicenter of the state's housing foreclosure crisis.

Escalating interest rates had nothing to do with many of the foreclosures there.

(Am I the only one who is not surprised? My months of house hunting on the North Side have led me to the conclusion mortgage fraud completely infects the North Side, and it's not just a T.J. Waconia or Universal Mortgage thing, either. There were either other rings of (alleged and accused and probably guilty) fraudsters OR it became so common it may have been virtually part of the culture, an everybody-is-doing-it kind of thing like...like...illegal "mother-in-law" apartments, for example)

About three-quarters of the area's homes that were sold by the sheriff went into foreclosure even before the mortgage's interest rates might have jumped.

"There are a lot of homeowners out there who didn't even make a payment or made one or two payments," said attorney Mark Ireland, who works for the nonprofit legal center that commissioned the study.

The study covered 2005 and 2006 sheriff's sales in the two ZIP codes that make up much of the North Side, 55411 and 55412.

The study area had almost exactly half of the city's foreclosures in 2006 and slightly more than one-quarter of those in Hennepin County, which accounts for nearly one-third of Minnesota foreclosures.

The area south of Lowry Avenue had a 2006 foreclosure rate of 5 percent, five times higher than the city rate of foreclosure. The area north of Lowry had a 3.6 percent rate.

(Huh. Yeah, that's right where I'm seeing bargains. South of Lowry. Every place I've seen south of Lowry has appraisals jacked to the moon)

Much of the foreclosure crisis has been blamed on subprime mortgages made to people with credit problems.

Those loans often contained interest rates that rise sharply after two years, triggering higher monthly payments.

But the data indicate that one-quarter of the foreclosed mortgages reached a sheriff's sale within a year of the loan date -- twice the county's overall rate -- and 74 percent did so within two years.

That means that many borrowers stopped making payments even before interest charges escalated.

Some may have been straw buyers, working for a kickback from the mastermind of a fraud scheme who puts the house and mortgage in the buyer's name.

Some may have been people who were serial borrowers, refinancing several times as their mortgages hit the crisis point.

That's the analysis of Ireland, a lawyer at the Foreclosure Relief Law Project, which commissioned the study by HousingLink, a nonprofit housing information provider.

"It's people who were basically already behind and, due to really lax underwriting standards, were given another mortgage," he said of the latter group. "A lot of people will debate over who's really at fault there."

Lenders too often blamed

Tim Bendel, president of the Minnesota Mortgage Association, said he thinks lenders too often get the blame. He said many foreclosures involved landlord investors. When they didn't get the rents they expected and then saw property values fall, they stopped making payments, he said.

But University of Minnesota law instructor Prentiss Cox said lenders pushed loans to many people who never should have qualified for credit.

(Well, with all due respect to Cox--and I do respect him--it's very hard to get all worked up about "predatory lending." Like, oh, I'm such a victim...you're just PUSHING this money on me)

He thinks that mortgages with built-in interest-rate jumps after a lower teaser rate expires have been given too much emphasis as a reason for borrowers hitting foreclosure.

"The lenders really invented and aggressively sold all these things. Are individuals responsible for their choices? Yes. But so far individuals in their houses and their communities are the only ones who have paid the price," Cox said.

(Plus a few dozen folks arrested, indicted, etc., but why mention THEM?)

He said that although jumps in subprime interest for borrowers with poorer credit are peaking, there's another wave of interest-rate jumps ahead: Resets on adjustable-rate prime mortgages will peak in the next two to three years for more credit worthy borrowers.

Researcher Elissa Schloesser found that borrowers in the two North Side ZIP codes typically owe more on their loans at the time of the sheriff's sale than on the day they got the loan -- by about 4 percent.

That means they didn't keep up with accumulating interest -- even before the lender's foreclosure costs were added to the debt.

Ireland said that the foreclosure project sought the data as part of an analysis of the potential for a lawsuit based on the targeting of certain areas for disadvantageous types of loans.

(Though I might be a bit cynical, I'm very interested to see what kind of patterns they have found which would put the blame on LENDERS instead of systematic mortgage fraud by persons who aren't indicted. But can those persons be FOUND? Do those persons still have the MONEY? Banks make a much more promising "deep pockets" target, don't they?)