Minnesota Housing Market: What Now?

With foreclosures mounting and the subprime Minnesota mortgage industry melting, a University of Minnesota housing forum Friday broached the $64,000 question: What now?

The forum offered few concrete answers to a complicated question, aside from discussing tough state anti-predatory-lending bills. Hosted by the university’s Center for Urban and Regional Affairs in Minneapolis, the meeting illustrated a groundswell of diverse attempts across the country to address an epidemic of foreclosures that shows no signs of abating anytime soon.

In one far-reaching move elsewhere, the Association of Community Organizations for Reform Now, the housing activist group known as ACORN, this past week called for a national one-year moratorium on foreclosures involving reckless bad credit home loans. On Thursday in Washington, meanwhile, lawmakers attending a U.S. Senate Banking Committee hearing on mortgage-market turmoil accused federal regulators of inaction.

And the mortgage industry itself continues to do some self-correcting.

Speakers in Minneapolis on Friday appeared to agree that risky subprime mortgage lending is primarily to blame for the spike in foreclosures around the Twin Cities and the rest of the country.

About 14 percent of the total $10.03 trillion of outstanding mortgages in the country are considered subprime, according to the Mortgage Bankers Association.

Turmoil in the $1.36 trillion U.S. subprime-mortgage market continues as home prices weaken, defaults rise and investors and lenders back away from riskier subprime mortgage products such as mortgages with no down payments.

“This was a social experiment, and it’s terrifying,” speaker Prentiss Cox said of subprime lending. Cox is a University of Minnesota law professor specializing in consumer protection.

Speaker Karen Reid, executive director of the St. Paul-based Neighborhood Development Alliance, underscored the local financial impact of rising foreclosures, charting the “arc of hardship” of more than 900 vacant homes in various Minnesota housing markets. Each vacant home costs the city government alone $5,358 in reduced taxes, unpaid service fees and maintenance costs, Reid said, citing a 2005 study by the Bloomington-based Homeownership Preservation Foundation.

That study, based in Chicago, estimated that each foreclosure costs local governments and neighborhoods at least $34,000. Indirect financial impacts are far greater, depending on how much foreclosures drag down nearby property values, the study found. As for the mortgage industry, each foreclosure costs it an average of $59,000, including costs to resell the house, according to a widely cited 2002 study by Craig Focardi at Needham, Mass.-based TowerGroup Inc.

Reid said that lenders appear more likely now to negotiate with borrowers who have fallen behind. She and foreclosure-prevention counselors in the audience urged homeowners to get free counseling early on and not wait until they get foreclosure notices to seek help. There are some assistance funds available to help troubled homeowners switch into better home loans.

A storm of rising foreclosures nationally and the implosion of the subprime mortgage market has sparked other changes around the country in recent months.

Federal and Minnesota regulators issued guidelines late last year on making nontraditional mortgages, urging originators to do a better job of gauging their risks and a borrower’s ability to repay, and ensuring that consumers are fully informed of the terms of their loans, among other things.

Freddie Mac, said last month that as of Sept. 1, it no longer will buy securities backed by particularly risky adjustable-rate mortgages, or no-income/no-asset mortgages. It also will toughen up its requirements for documenting incomes.