Foreclosures In Twin Cities Leveling Off - For Now

Foreclosures in the Twin Cities and across Minnesota keep piling up in record numbers, but the rate of increase this year has leveled off a bit, according to a report released Friday.

There were 13,334 foreclosures in the Twin Cities during the first three quarters of 2008, compared with 12,974 during all of 2007, according to the report from HousingLink, a Minneapolis nonprofit. The statewide total for the first three quarters was 20,098, the report found, compared with 20,404 last year throughout Minnesota.

Based on HousingLink's projections, foreclosures in the Twin Cities will be up 39 percent from 2007 to 2008. The rate of change in the metro area from 2006 to 2007 was much greater at 84 percent.

The finding supports the idea that Minnesota already has experienced what Prentiss Cox, a University of Minnesota law professor who studies the housing market, argues is the first wave of the foreclosure crisis. That wave, he said, has been tied to the "inevitable" failure of homeowners to make payments on subprime mortgages.

Such foreclosures crested in Minnesota this summer, Cox believes, and likely will continue to decline, since subprime lending largely came to a halt in mid-2007.

But there's still a second wave of foreclosures on the horizon, Cox said — homeowners failing to stay current on payments for so-called "Alt-A" adjustable-rate mortgages.

"Alt-A" is the slice of the mortgage loan market that ranks just above subprime in creditworthiness.

Those loans were made primarily from late 2003 to 2006, and typically start resetting after five years, Cox said.

Whether those homeowners will be able to stay out of foreclosure will have a lot to do with the general health of the economy, he said.

"The second wave could be substantially less — we could see a moderation and a downturn in foreclosures," Cox said. "Or, it could make the first wave look bad but not remotely as bad as the second wave."

Subprime loans generally are targeted to borrowers with tarnished credit histories and little savings available for down payments, according to researchers at the Federal Reserve.

Borrowers with Alt-A mortgages have less serious credit-quality issues, Fed researchers say, or are unable or unwilling to provide full documentation of assets or income. Some of these borrowers are investing in real estate rather than occupying the properties they purchase.

A report earlier this year from the Minneapolis Fed found that six of 10 Alt-A mortgages in Minnesota are scheduled to have their rates reset at some point after Jan. 1.

This week, the Federal Reserve Bank of Atlanta issued a report that noted, among other things, that the rate of foreclosures linked to subprime loans generally has declined in most Fed regions, while foreclosure rates are on the rise for prime and near-prime borrowers, including those with Alt-A and adjustable-rate loans.

Despite the concern about a possible second wave of foreclosures, a report Friday from Edina Realty provided a more upbeat view of the housing market, citing figures from a national report that found more than 60 percent of all foreclosure activity in the U.S. during the third quarter of 2008 was concentrated in six states: California, Florida, Arizona, Ohio, Michigan and Nevada. Courtesy Saint Paul Dispatch.