Weathering the storm: Community developers in Minnesota face the foreclosure crisis

Foreclosure Photo Gallery

A notice of foreclosure doesn't just affect the homeowner who receives it. It erodes the foundation of the entire community. It depletes property values and institutional trust, weakens self-confidence, and leaves a deep mark on personal finances, industry balance sheets, and community stability.

Homeowners in Minnesota have been the recipients of most of the foreclosure notices in the Ninth Federal Reserve District. In 2007, Minnesota experienced more than 20,000 foreclosures—an increase of more than 200 percent over 2005.^1/ Most have been concentrated in the cities of Minneapolis and St. Paul, which have been dramatically affected by the wave of foreclosures and resulting vacancies.

In the hardest-hit parts of the two cities—North Minneapolis and St. Paul's East Side neighborhoods—foreclosures are dismantling neighborhood revitalization efforts by reversing gains in homeownership rates and market values. It's projected that Minnesota will experience an additional 28,000 foreclosures in 2008,^2/ likely resulting in further neighborhood deterioration and destabilization across the state.

During the latter part of 2008, much of the focus of the recovery from foreclosures and the credit crisis was on large-scale, national solutions. Nonetheless, at the neighborhood level, recovery will come house by house and block by block. This article takes a close look at foreclosures in Minnesota, with a focus on North Minneapolis and the East Side of St. Paul, and identifies ways communities are addressing the problem, individually and collectively.

A troubling trend

Historically, most foreclosures have been caused by unexpected events that create economic hardships for homeowners, such as job loss, divorce, or catastrophic illness. Many foreclosures in the current market have been triggered by broader factors, such as mortgage rate resets, low or falling home equity values, real estate flipping, and aggressive marketing of high-cost loans. Neighborhood organizations such as Dayton's Bluff Neighborhood Housing Services (DBNHS) in St. Paul noticed the last trend a number of years ago and thought the future looked grim.

"When we looked at Home Mortgage Disclosure Act data, we could see that there was a lot of subprime lending going on [in the neighborhood] and we could tell this was not going to be a good thing. We first noticed this in 2002 and saw it peak in 2005," recalls Jim Erchul, executive director of DBNHS. According to Erchul, the surge in subprime loans is partly due to the fact that brokers encouraged some people with prime loans to switch to subprime as a means of gaining equity to pay for other bills.

"Some people have done this two or three times," says Erchul. In one instance, brokers convinced a family that had no health insurance to switch to a subprime loan in order to gain equity to pay for their son's medical bills. "They were told closing costs would be $5,000 and they turned out to be $20,000," says Erchul. "They would have been better off just not paying the bill."

The return of blight

Driving through North Minneapolis and St. Paul's East Side, the sight of vacant, foreclosed homes is hard to miss. In some of the hardest-hit areas, no block is untouched. The situation affects not only the families who lose their homes, but also those who remain in the neighborhood. Foreclosures and the large number of real estate owned, or REO, properties they create have contributed to declines in home values. (REO refers to properties that have been taken back through foreclosure and are owned by the lender.) For example, staff at DBNHS estimate that values on the East Side of St. Paul have dropped almost 40 percent from 2007 to 2008. As a result, more homeowners in the neighborhood, regardless of whether their loans are prime or subprime, may now owe more on their mortgages than their homes are worth. As more and more homes are left vacant due to foreclosure, the return of housing blight^3/ may overwhelm some neighborhoods, leading to increased criminal activity and further declines in property values.

However, homeowners are not the only victims in the foreclosure crisis. Renters have also been affected. When a landlord faces foreclosure, tenants often face eviction. According to estimates from staff members of city agencies, approximately 50–60 percent of foreclosures in North Minneapolis and the East Side of St. Paul have been on investor-owned properties. As displaced renters seek out vacancies in the remaining supply of rental housing, they face competition from foreclosed homeowners who have entered the rental market. As a result, many families have found themselves homeless or without quality housing alternatives. According to a national survey conducted by the National Coalition for the Homeless, nearly 61 percent of local and state coalitions for the homeless have seen an increase in homelessness since the foreclosure crisis began.^4/

A threefold strategy

As the incidence of vacant properties has increased, nonprofit neighborhood organizations and community development corporations (CDCs) have become key players in addressing the negative effects of neighborhood blight. To date, their strategy has been threefold. First, community organizations have identified the owners of individual properties that are in close proximity to current or proposed developments of housing, commercial, or community facilities in the neighborhood, usually in areas where CDCs and others have made considerable investments already. Second, CDCs and other neighborhood-based organizations have stepped up communication and coordination with city code-enforcement agencies to try to make sure that the owners keep their properties properly secured and maintained. Third, these same groups have increased marketing efforts to attract prospective buyers. They promote neighborhood amenities and the fact that housing is now more affordable than in recent years.

In addition, several CDCs, local lenders, and public institutions have begun to develop financing products to help prospective homebuyers purchase properties in certain neighborhoods. For example, the Minneapolis Advantage program is one early effort on the part of the City of Minneapolis to address the concentration of foreclosures and vacant properties. The program provides down payment and closing cost assistance to first-time homebuyers who purchase a home in the McKinley, Folwell, or Webber-Camden neighborhoods in North Minneapolis. The homebuyer receives a $10,000, zero percent interest loan that is forgivable if he or she lives in the house for five years or longer. The city has also used other creative tools to address the problem of foreclosed, vacant properties, including aggressive acquisition; enhanced regulatory tools, such as aggressive inspections enforcement and increased vacant-property fees; legal strategies, including lawsuits that force lenders and servicers to the table to negotiate workouts with borrowers; and campaigns that market neighborhoods to specific groups of potential homebuyers.

"When the housing crisis started, the first thing we did was access data that could give us an accurate assessment of where the foreclosures were and how widespread the problem was," says Tom Streitz, director of housing and policy development for the City of Minneapolis Community Planning and Economic Development Department. "Once we realized the scope, we went to work with a variety of outreach programs." Examples include continuing the Don't Borrow Trouble ad campaign, which spreads the message that help is available to people in foreclosure; using the city's 311 information line to direct people to assistance and counseling; putting informational inserts in utility bills mailed to strategically important areas; and sponsoring housing fairs at which homeowners can talk directly to lenders.

"Counseling and prevention were key in those early days," Streitz continues. "From there, we moved toward intervention by targeting six cluster areas [on the north side], working with the neighbors and select nonprofit and for-profit developers to purchase properties for demolition or for rehabilitation and resale. Working in these clusters enables us to have a strong, visible impact on a community and to hold back blight. Adding incentives for buyers, such as the Minneapolis Advantage—which has been wildly popular—has also had a positive impact in these distressed communities."

Collaborative efforts are under way

As the examples from the City of Minneapolis demonstrate, work is being done to combat foreclosures in some neighborhoods. However, the scope of the foreclosure crisis in Minnesota demands a widespread response from all sectors, including banks, mortgage lenders and servicers, real estate agents, government agencies, nonprofits and CDCs, elected officials, private developers, and community leaders and residents. Recognizing the need for this collaborative, comprehensive approach, key institutions came together in late 2006 and formed the Minnesota Foreclosure Partners Council (MFPC). The goal of the MFPC is to identify, fund, and implement coordinated policies and programs that effectively address the impact that the recent surge in mortgage foreclosures has had on families, neighborhoods, and communities in the Twin Cities region and throughout Minnesota (For more on the MFPC, visit www.ci.minneapolis.mn.us/foreclosure.)

The council's early efforts included ramping up foreclosure prevention counseling and making investments in pilot programs. Interventions and pilot programs already under way include the following.

• The Greater Minnesota Housing Fund, Minnesota Home Ownership Center, Family Housing Fund, and Minnesota Housing have developed a collaborative statewide funding plan to increase foreclosure prevention counseling services, outreach, and tenant assistance. According to its developers, the plan will prevent nearly 5,700 foreclosures by the end of 2008 at a counseling cost of $425 per household. The intervention will save over $2.4 million based on average foreclosure costs to the homeowner and lender (estimated at roughly $57,000 per household).
• With help from the Family Housing Fund, DBNHS in St. Paul and the Greater Metropolitan Housing Corporation in Minneapolis have developed a contract for deed program that is designed to enable renters to become homeowners in three to five years. The contract for deed is designed to assist individuals who want to be homeowners but are not yet ready for a conventional loan product.
• Through its Building Sustainable Communities initiative, Local Initiatives Support Corporation (LISC) has been working in Duluth and the Twin Cities to engage communities affected by foreclosures and vacant properties. The goal is to ensure that the work being done to address the issue is connected to and not isolated from other community development issues. (For more on the Building Sustainable Communities initiative, see the sidebar below.)

A framework for recovery

In recent months, the MFPC has turned its attention toward neighborhood recovery. Council members have designed a recovery framework that identifies neighborhood-focused strategies and pilot efforts for combating the rising number of vacant and boarded homes. The framework—which is an evolving, collaborative document—also identifies ways to meet homeowners' needs for capital and credit to stave off foreclosures. The framework's developers recognized that prevention and workouts are critical strategies for stemming the flow of foreclosures and promoting community recovery.

The recovery framework has five key principles:

• Strategies must be oriented toward providing incentives that reactivate and redirect the marketplace. Reactivating refers to getting conventional lenders to lend to creditworthy borrowers in areas affected by foreclosures, while redirecting refers to getting private investors to act with the community's well-being in mind.
• Government and nonprofit institutions have instrumental roles: providing clear and consistent signals to the marketplace regarding what public resources are available to developers and what the expectations are, in terms of community standards for property management and maintenance; taking the lead on "research and development" of new credit products; and filling gaps in markets that are not profitable for, or of interest to, the private sector.
• Unique community circumstances will require a commonly available set of tools and resources, which can be applied locally.
• Strategies must look to the future and build on likely future economic and demographic trends.
• Urgent, yet sustained, effort is needed.

Drawing from these principles, the framework has three main recovery goals:

• Prevent 10,000 foreclosures. The MFPC has identified two main tools for reaching this goal. The first is to provide foreclosure counseling and the second is to develop refinancing loan products and/or provide incentives for private market refinancing.
• Assist 2,850 homebuyers with acquiring mortgages and homeownership counseling. There remains a need for loan products for prospective homebuyers, particularly in neighborhoods where there are concentrations of foreclosures and vacant properties. Pre- and post-purchase counseling and rehab guidance should also be made available to the homebuyers.
• Acquire 4,500 homes, make appropriate improvements to them, and place them back onto the private market. To support distressed neighborhoods, the MFPC has set a goal of acquiring and rehabilitating the homes through a partnership among public agencies and nonprofit and for-profit developers. Disposition may take a variety of forms—including selling homes to owner-occupants or converting them to quality, scattered-site rental—allowing for a controlled release of properties back onto the marketplace as localized neighborhood housing markets begin to improve.

Perhaps most important, the neighborhood recovery framework has helped prepare Minnesota to take full advantage of federal assistance from the $3.9 billion Housing and Economic Recovery Act. The framework has also positioned Minnesota to pursue creative property-disposition strategies, such as the National Community Stabilization Trust, or NCST. The purpose of the trust is to help local organizations attain properties from lenders and servicers in order to enable their rehabilitation and reuse. In mid-2008, the NCST's sponsors selected Minneapolis-St. Paul as the national pilot site for refining the negotiation and transfer process. (For more on the NCST, see the sidebar below.)

From crisis to opportunity

The correlation between the economic downturn and the housing market is clear. In the words of private developer Chuck Leer of Minneapolis, "The key to economic recovery is the housing market. And housing will not recover until we stem the foreclosure crisis. The dark cloud of foreclosures has fractured neighborhoods, sent prices into a tailspin, and left us all feeling vulnerable. The silver lining for all is an abundant supply of more affordable housing and unprecedented opportunities to revitalize our community. The foundation for recovery will be built on civic ingenuity, hard work, and market solutions. Our task is to turn this crisis of fear into the promise of hope."

There are no easy solutions to the foreclosure crisis and the upheaval it has brought to our communities. The crisis has hit hard, and there is plenty of bad news to go around. But we can also take heart. New ideas, partnerships, and solutions are emerging. The community development industry has over 30 years of experience and ingenuity. This time of unprecedented challenge has created an opportunity for the industry to reexamine its approaches to neighborhood-based revitalization and community development. It has also created an opportunity to collaborate, think holistically, and reposition efforts to develop strong, stable neighborhoods that can weather any future storm.

Andriana Abariotes is the executive director of Twin Cities LISC. Rose Carr is an intern with Twin Cities LISC and is pursuing a master's degree at the University of Minnesota's Hubert H. Humphrey Institute of Public Affairs.

Foreclosure Photo Gallery

1/ Foreclosures in Minnesota: A Report Based on County Sheriff's Sale Data, HousingLink, April 2008.

2/ Ibid.

3/ Housing blight, broadly defined, refers to housing structures and properties whose physical conditions have deteriorated.

4/ Foreclosure to Homelessness: The Forgotten Victims of the Subprime Crisis—A National Call to Action, National Coalition for the Homeless, April 15, 2008.