Minnesota sees more foreclosures coming

In a sign that the housing recovery is still on shaky legs, foreclosures in Minnesota in the first quarter rose for the fourth straight quarter, reaching the third-highest level during the current housing crisis.

There were 6,716 homes sold via sheriff sales, an 11.2 percent rise over the previous quarter, and a 28.3 percent increase over the same period last year, according to data released Tuesday from HousingLink, a nonprofit dedicated to affordable housing. The only higher periods were in the second and third quarters of 2008.

And unlike that wave, which largely struck lower-income neighborhoods in Minneapolis and St. Paul where a lot of subprime and predatory lending took place, this so-called second wave is hitting suburbia.

Today, "it's about the jobs and the people, it's not about the loans," said Julie Gugin, executive director of the Minnesota Home Ownership Center.

The rising foreclosures come as the real estate industry waits to discover its new normal. Strong sales in recent months have largely been credited to federal home-buyer tax credits that expired Friday. The market was in a frenzy last week as both buyers and sellers tried to beat the deadline. But many of those sales were likely pulled ahead, leaving the market in question in coming months.

Higher prices of late might also be in jeopardy, particularly if a new wave of foreclosures continues.

While population-heavy Hennepin and Ramsey counties led the way in terms of the number of foreclosed properties, the suburbs and communities cradling the suburbs are experiencing larger percent changes.

Drive further away from Minneapolis-St. Paul and foreclosures in the first three months of the year are up 41 percent in Sherburne County, 40 percent in Carver County and 24 percent in Wright County. Families in these areas may have stretched to buy a house or could afford a house on two incomes, Gugin surmised. But a job loss, income reduction, or life event such as an illness or divorce could have changed that.

Aside from income challenges, negative equity -- or owing more for your home that it is currently worth -- is another contributor. Tom Musil, a real estate professor at the University of St. Thomas, said some owners who purchased at the peak are choosing to trash their credit and stop paying their mortgage. A recent study by First American CoreLogic found the typical U.S. homeowner who owes more than their home is worth may not have equity in the property until late 2015 at the earliest.

Musil also notes that loan modifications that didn't go far enough are another reason for the rise.

Michael Grover, who studies foreclosure patterns for the Federal Reserve Bank of Minneapolis, said backed up pipelines of foreclosures at banks may also have contributed to a rise in sheriff's sales.

On Monday, the Minnesota Home Ownership Center released another sobering set of statistics. In the first quarter, pre-foreclosure notices -- information lenders must send homeowners about foreclosure counseling before foreclosure proceedings begin -- are the highest that they've been since the center started collecting the data in fall 2008. While not all borrowers who receive such a notice ultimately lose their homes, the numbers suggest that foreclosures will continue to increase in the second and third quarters.

Joy is hoping job growth, while anemic, will help consumers feel comfortable spending again.

If the housing market does continue to struggle, the economy likely will, too. "When you consider that homes are typically the single biggest assets on consumer balance sheets, it's an important factor in the psychology of spending," he said.

Using home equity for big ticket purchases or remodeling is also a thing of the past for many homeowners. "Consumers still have a lot of work to do to get their balance sheets strong again," Joy said. "So that tends to be a headwind for consumer spending as well."

Musil, of St. Thomas, says there's "no question" significant numbers of foreclosures will continue through the end of the year. "We have to get through this and have some stabilization or downturn in foreclosures for [housing] markets to stabilize," he said. "At that point, we'll set a new baseline for prices."