The dramatic downturn in housing and near collapse of the subprime lending market is beginning to hit parts of rural Minnesota, including St. Louis County, where the number of home foreclosures is expected to double this year over 2005 levels.About 400 foreclosures are now expected in the county in 2007, up from 219 two years earlier. Those 400 foreclosures represent a little over two percent of the roughly 17,000 mortgages recorded in the county annually, but housing officials say it could be the first evidence of a growing problem for homeowners in the county.
Warren Hanson with the Greater Minnesota Housing Fund called the situation an “invisible epidemic” that is affecting all corners of the state. The GMHF recently released a statewide analysis which reported 11,207 foreclosures throughout Minnesota last year, or nearly double the number reported in a national study conducted by a private real estate information company. “The national wave of subprime mortgage foreclosures has resulted in hardship for thousands of families throughout the state,” said Hanson.
Foreclosures can devastate family finances, according to Hanson. Following foreclosure, many families are displaced from their neighborhoods and communities, and their credit ratings are irrevocably damaged. In addition, foreclosures can result in abandoned properties that may reduce the value of nearby homes and adversely impact entire neighborhoods.
A recent congressional report estimated the cost of home foreclosures to families, neighborhoods, and communities at $80,000 per home.
Local finance officials agree that the number of foreclosures in the area is up. “We watch it every week,” said Diane Meehan, president of the State Bank, in Tower. “You used to see one or two in a week but now the list is getting lengthy,” she said.
Meehan said the practices of some lenders themselves may have contributed to the problem. Meehan said established banks and credit unions in the area are generally not seeing an increase in foreclosures themselves, in part because their mortgages are regulated and must meet strict criteria before being issued.
But the real estate boom of three and four years ago brought many new lenders into the business and some of them weren’t as selective in their borrowing. “A lot of people were affected by the 100 percent mortgages,” said Meehan. Such mortgages allowed individuals to purchase homes with no down payments, and often with adjustable rate mortgages. Meehan said rising interest rates over the past two years have boosted monthly payments on those adjustable rate mortgages, often beyond what homeowners can afford. “Lots of people were buying homes that way,” said Meehan.
Foreclosures often result from what are called subprime loans and predatory sales practices. “Not all subprime loans are predatory,” University of Minnesota housing-studies professor Jeff Crump said, “but nearly all predatory loans are subprime.”
Predatory practices include lending without regard to borrowers’ ability to pay, failing to verify borrowers’ income, “churning” or repeat refinancing, charging excessive fees, and high-pressure sales and marketing. “Predatory loans,” says Crump, “are sold, not bought.”
In fact, Crump said, “half of subprime borrowers actually would have qualified for a prime loan.”
In recent years, subprime loans have come to comprise a significant percentage of home mortgages. According to federal data, suprime loans now represent about 25 percent of all home mortgages in small communities in Minnesota. In some counties in the state, it’s nearly 50 percent.
“I don’t think some of these lenders did their clients any favors,” commented attorney Mark Weir, with Vermilion Law Office in Tower. “Many have gotten into financial burdens that are way over their heads,” he said.
And the problem isn’t going away soon, according to individuals involved in housing issues. “Our research suggests that with flat or depreciating home values expected to continue, the foreclosure surge is nowhere near the end,” said Melissa Manderschied, an attorney with Kennedy and Graven in Minneapolis.
Help is out there
Homeowners facing the prospect of foreclosure can get advice from the Minnesota Home Ownership Center at 866-462-6466. Other organizations, like the GMHF, are also working with partners and affordable housing funders to assist families and communities facing foreclosure. The GMHF can be reached at 800-277-2258.
