Out of House and Home

'Foreclosure of the Mortgage' by George A. Reid

'Foreclosure of the Mortgage' by George A. Reid

On the walls of Room 30, a cramped, windowless chamber in the bowels of Minneapolis's City Hall, hang two decorations. One is the framed dust jacket of a book about the Minnesota Vikings and a note explaining that sales of the volume benefit Special Olympics Minnesota. The other is a small, framed print titled Foreclosure of the Mortgage, by George A. Reid. The image shows an invalid father surrounded by his destitute family, including an infant in a cradle, as a black-clad bailiff reads a notice of repossession of the family's home. Reid actually painted the scene twice: The first work was burned, but the artist's preparatory study, rendered in 1892, survived, and in 1935, Reid repainted it.

It's a dismal scene and a curious choice of decoration. But Room 30 is where, weekdays at 10:00 a.m., delinquent mortgage holders and their properties are formally, quietly parted. More whimper than bang, the proceedings are rarely attended by anyone other than clerks from a handful of local law firms that handle mortgage foreclosures and the uniformed Hennepin County Sheriff's deputy responsible for the transaction, which is technically a sale. Every now and then a homeowner shows up to watch the bank buy back their house, but most of the time it's far more impersonal than, say, traffic court.

Last year this scene played out twice a week in the county sheriff's office. But the number of foreclosures is up sharply, and today the auctions are held at least four mornings a week. By the end of April, there were 50 percent more foreclosures in Hennepin County than there were in the year-to-date ending in April 2005, or 776 vs. 515. More than half the defaults, or 430, occurred in Minneapolis; Brooklyn Park had 91 and Brooklyn Center 42. The numbers are up in Ramsey County, too: There were 498 foreclosures there in 2004, and 626 in 2005. So far this year, there have been 498.

(According to the foreclosure-sales industry website RealtyTrac, foreclosures in Minnesota are up 133 percent over last year. Local foreclosure experts, however, caution that RealtyTrac is in the business of advertising foreclosed properties, and this statistic is probably exaggerated.)

The most obvious explanation for the hike, according to consumer credit experts, is that the bills have finally come due for the creative financing schemes that drove the red-hot mortgage industry over the last five years. Since 2001, as home prices have skyrocketed and wages stagnated, the 30-year fixed-rate mortgage has ceased to be the norm. In addition to long-available adjustable-rate mortgages, which allow people to buy more house than they could otherwise afford by offering low introductory rates, prospective homeowners can now take out 40-year mortgages, interest-only mortgages, and, most risky, the so-called option-ARM, or negative amortization loan, in which the buyer pays only a portion of the interest while the balance is quietly tacked onto the principal. (See City Pages' "No Money Down, a Lifetime to Pay," September 7, 2005.)

Meanwhile, the fastest-growing sector of the mortgage industry has been the so-called subprime lenders, nontraditional lenders willing to extend credit—albeit on horrible terms—to consumers with bad track records. Because these lenders have been willing to loan homeowners more than the equity they have in their homes, or to overvalue their houses, borrowers in this category have been able to borrow far more than they can realistically pay. And because the fees associated with these loans are so high, borrowers often end up owing more than their home is worth.

It's this last category of borrowers that credit counselors and consumer advocates suspect are behind the increase in foreclosure rates. Because of the rise in home values and interest rates that, until recently, were at historic lows, virtually anyone who owns a house has earned some equity and has been able to borrow against it. Having tried to get ahead by refinancing several times, people whose homes are now in foreclosure have most likely simply spent all of their equity, they say.

"The gas tank is empty in terms of options for refinancing out there," says Dan Williams, foreclosure prevention coordinator for Lutheran Social Services Financial Counseling. "Once you're out of equity, lenders don't want you anymore."

Twin Cities numbers are appalling, Williams adds, but if the calls to his office are any indication, rates are even higher in central Minnesota counties like Sherburne, Isanti, and Mille Lacs. "Property values there are rising terribly fast as people moving out of the metro area are willing to pay more," he says. "That gives you more equity to refinance, but what doesn't exist is any good jobs." Another factor: Before the start of the recession, people had access to decently paid second and third jobs. That's not the case these days.

Worse, Williams and others working with homeowners in foreclosure say that high as the new numbers are, they probably don't reflect the number of households in dire straits. Because of a state law that went into effect in October 2004, anyone in Minnesota facing foreclosure is now given simple, clear information on where to turn for help forestalling the creditors. And homeowners who somehow miss the large, fluorescent-colored flyers that arrive with the default notices have several options for reclaiming their property—even after the sheriff has sold it.

Because his office hears from people who've read the flyers, Williams is sure people now losing their homes are truly penniless, and probably have been for a long time.

"When we look back on this era, we're going to say, 'Holy crap, people are spending wealth as if it were income,'" says Williams. "We've converted the whole American psyche of double-checking whether this transaction is reasonable."