Foreclosures closing in on cash-strapped families
Eric Wieffering
Star Tribune
Published 12/29/2002
The economy may be showing signs of recovery, but these are times of quiet financial desperation for a growing number of people in the crescent of suburbs that surround the Twin Cities.
Unemployment remains stubbornly and comparatively high in certain industries, and bankruptcy filings are surging. Home values continue to increase, but so do the number of people who can no longer afford to make their mortgage payments.
By the end of November, home foreclosure sales in fast-growing Sherburne County were already up 50 percent over all of 2001. Foreclosures in Carver County, home to some of the highest household incomes and home values in the region, have almost tripled this year, and personal bankruptcy filings are up 26 percent.
"We've seen a 50 percent increase in the number of people coming in for help," said Jan Backlin, a mortgage foreclosure prevention counselor for Anoka and Washington counties. "A lot of people are in deep financial distress."
Recessions always bring a spike in foreclosures and bankruptcies, but lawyers, mortgage counselors and others say things are different this time. Many homeowners have taken advantage of soaring home values and low interest rates and have borrowed heavily against their homes to pay off credit cards, meet margin calls in their depleted brokerage accounts, or buy new plasma- screen televisions. A job loss, drop in income or a sudden, unexpected expense has left them with little or nothing to fall back on.
"People have been encouraged or duped into stripping all the equity out of their homes," said Liz Ryan Murray, a program officer with the Home Ownership Center, a consumer advocacy group in St. Paul.
Nationwide, more than 12 of every 1,000 mortgaged homes were in foreclosure at midyear, up from nine a year earlier, according to the Mortgage Bankers Association of America. In the three months ended last June, lenders began foreclosing on four of every 1,000 mortgaged homes, the highest rate in the 30-plus years the association has been keeping records.
Minnesota's foreclosure rate is still half the national average, in part because of the number of assistance programs available to homeowners. But the state's rate is rising too. At midyear 2001, fewer than four of every 1,000 mortgaged homes were in foreclosure in Minnesota. Twelve months later, 5.3 of every 1,000 mortgaged homes in Minnesota were in foreclosure, and five times that many were at least 30 days late on a mortgage payment.
Job losses hurt
The economy is the main culprit. Minnesota has seen a net loss of about 54,000 jobs since March 2001. Unlike previous recessions, the most recent hit the Twin Cities especially hard as companies such as ADC Telecommunications and Northwest Airlines slashed their payrolls. State figures show that the Twin Cities lost almost 30,000 high-paying transportation and high- tech manufacturing jobs in an 18-month span.
"In many ways, the Twin Cities was in the eye of the storm of this recession," said Jay Mousa, director of research for the Minnesota Department of Economic Security.
The bulk of foreclosures is still in Hennepin and Ramsey counties, but the total is up less than 2 percent so far this year. Foreclosure sales in Scott County through November, meanwhile, were up 55 percent over all of 2001. Hennepin and Ramsey counties also had the smallest increase in personal bankruptcy rates during the three months ended Sept. 30.
Nationwide, foreclosure rates are higher among low-and moderate-income families with imperfect credit and high-interest loans. But that is not the case in the newer, wealthier Twin Cities suburbs, where the price of a house can easily top $200,000. Recent foreclosure notices include a $3 million Wayzata house, a $250,000 home in Maple Grove and a $400,000 home in Chanhassen.
Too much house
In Carver County, the median household income is $65,540 and the average sale price of a house in 2002 is up 19 percent, to $265,448. "Most of our clients have conventional, low-interest mortgages, but they've suddenly found themselves with more house than they can afford," said Denise Maki, a housing counselor with the Carver County Housing and Redevelopment Authority.
One Waconia couple fell behind on their $170,000 mortgage after the salary of the husband, who works in the travel industry, was reduced after Sept. 11, 2001. "We thought it would be increased in 2002, but it wasn't," said the wife, who spoke on the condition that she not be identified. Their home has been scheduled for a Jan. 3 foreclosure auction, although they hope to negotiate a settlement with the lender before then.
Most lenders want to avoid foreclosure because they ultimately lose money on the property, said Larry Wilford, a St. Paul attorney who represents about two dozen mortgage lenders. Many private mortgage insurers also require lenders to develop workout plans for missed payments.
For government-insured FHA or VA mortgages, a minority of the loans issued in Minnesota, the Department of Housing and Urban development will pay up to a year of missed principal, interest and tax payments. In those cases, the homeowner signs a note promising to repay the amount when they refinance or sell the house, said Anita Olson, HUD's chief of customer service in Minnesota.
Help available
Unlike many states, Minnesota also has its own network of organizations to assist strapped homeowners.
The Minnesota Mortgage Foreclosure Prevention Association trains housing counselors throughout the state, and their organizations receive state funding that can be used, usually in the form of zero-percent-interest loans, by homeowners to catch up on missed mortgage payments.
Financial assistance is limited, however, to $5,500 per family, and the pinched state budget means many organizations have less money to dole out this year. Anoka County Community Action, for example, has seen its budget reduced 16 percent, to $50,000.
But even if they wanted to, housing counselors said they could not begin to meet the financial demands of some homeowners.
"In some of these cases we're seeing people come in who owe as much as $12,000" in back mortgage payments, said Backlin, the foreclosure-prevention counselor.
Some people have to sell their home to avert foreclosure, but many are reluctant to sell. Many have so much debt on their house that they would not get enough equity back to buy another one. The tight and expensive apartment market makes some fear that their family will end up homeless.
The Home Ownership Center, which tracks mortgage assistance efforts in Minneapolis and St. Paul, said its clients are, on average, 4.8 months behind on their mortgage payments. The average monthly payment rose to $795 through the first six months of 2002, from $619 in 2001. "Higher home values explains some of that increase, but it also reflects an increase in the number of people with second mortgages," Murray said.
A Chanhassen homeowner, who asked that he not be identified because he did not want his employer or family to know about his financial condition, lost his $50,000-a-year telecommunications job in February 1999 -- on the same day that he closed on a $92,000 townhouse. In the next 27 months he landed but lost three more jobs in telecommunications sales. He took out a $25,000 second mortgage, at 7 percent, to get current on his first, but additional long bouts of unemployment left him three months behind on his $595-a-month first mortgage and on his $110 monthly townhouse association fees. When he tried to refinance again last summer, lenders turned him down, and foreclosure seemed inevitable.
"I remember sitting at work one day, tears in my eyes, thinking I had no choice but to declare bankruptcy," he said. A last- minute, $4,200 loan from Carver County HRA helped him hold on to his house.
A growing number of homeowners are taking the bankruptcy route. Business is booming for Jack Prescott, a New Brighton attorney who specializes in personal bankruptcy filings. Most of Prescott's clients file a Chapter 7 petition, which is a liquidation of all debts, including the mortgage, although the lender can then foreclose. But a growing number of his clients are filing Chapter 13 petitions in hopes of holding on to their homes. A Chapter 13 filing halts the foreclosure process and forces the lender to negotiate a repayment plan for past-due mortgage payments.
"I do about thirty Chapter 13s a month, and nearly all of those are to save a house," Prescott said.
More and more homeowners, however, have little choice but to surrender, at least temporarily, their part of the American dream.
At 10 a.m. on a recent Friday, Sgt. Julie Boden stepped into the lobby of the Carver County Sheriff's Office, opened a manila folder and began the auction for a Watertown house. The 27-year-old owner, who bought the house four years ago, wasn't there, but a representative for the lender was.
When Boden finished reading the foreclosure notice, a representative for the lender presented a check for more than $94,000, the remaining balance on the mortgage. The owner will have six months to come up with a similar amount or be evicted.
Boden, who took over the foreclosure auctions in March after 18 years in a patrol car, said she was stunned by the number of county residents who were losing their homes and filing for bankruptcy. "I had no idea this was going on," she said.
-- Eric Wieffering is at ewieffering@startribune.com.
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