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Troubled homeowners wait for Obama’s plan — and worry

Brian Finstad and Connie Nompelis
MinnPost photo by Doug Grow
Brian Finstad and Connie Nompelis in front of a foreclosed and condemned house in the Clinton neighborhood of south Minneapolis. The house that two years ago would have cost $360,000 is now on the market for $85,000.

The Central neighborhood in south Minneapolis is dotted with old houses with “condemned” signs on the boarded up windows.

Up and down the streets of what could be a quaint neighborhood filled with lovely old homes, there are empty houses, which often have been ransacked by street people and addicts. A quasi-anarchist group has painted “free housing” on many of the empty homes. In fact, squatters, a miserable collection of hookers and drug addicts, move in and out of some of the properties.

“It must be awful to see mom, dad and the kids walking away from their homes because of foreclosure, tears in their eyes,” I said to two neighborhood homeowners, Brian Finstad and Connie Nompelis, who also are Central neighborhood activists.

“It’s not like that,” said Nompelis.

“It’s usually speculators,” said Finstad.

On his computer, he pulled up the history of a fourplex on 3000 block of 3rd Avenue.

The building, once a single-family home, had been turned into a four-unit apartment structure at some time in the past. It was boarded up in 1998 and later sold that year for $7,000 to a speculator. In 1999 it was sold again, for $17,000, to another speculator who gutted the building and, on the cheap, rebuilt it and sold it for $116,000. In 2002, it was sold for $202,000 to another speculator who sold it in 2004 for $262,000. In 2005, it was sold for $328,000 to still another speculator.

The rents from the four units, Nompelis said, could not possibly cover the cost of the mortgage. Clearly, the owner planned to make his profit by selling the property again.

But in inner-city Central, the real-estate bubble burst before it did in other places. When the owner couldn’t sell the property, he stopped paying utility bills. When the gas was cut off, the families that had lived in the apartments moved.

The owner ultimately walked away from the building.

IndyMac Bank of Pasadena, Calif., was left holding the mortgage. But IndyMac had problems of its own. One of the nation’s largest originators of home mortgages, IndyMac failed last July and was taken over by the Federal Deposit Insurance Corporation. The FDIC is in the process of selling IndyMac to something called IMB Management Holdings.

Meantime, the fourplex in Central is foreclosed, on the market for $67,000.

New round of speculation?
People such as Finstad and Nompelis fear that the process, speculators, investors, wheelers and dealers will begin anew and that aspects of President Obama’s $275 billion plan to help homeowners battle through foreclosure will only help ignite a new round of real estate speculation rather than encourage single family home ownership. Details of that plan are to be announced Wednesday.

Tom Streitz, Minneapolis Housing director, understands the concerns of people such as Finstad and Nompelis because the speculators have returned to heavily foreclosed neighborhoods in North Minneapolis in huge numbers.

“The investor activity in North Minneapolis is incredible,” Streitz said. “I saw an e-mail the other day, a group of Realtors inviting investors from all over the country to take bus tours through the neighborhoods. They’re pushing the idea that you can buy houses that a few years ago were sold for $200,000 for $39,000. They’ll have Realtors on the bus, ready to write up sales.”

Streitz is of two minds on this. One, the city doesn’t want to discourage private money from getting back into the housing market. But, on the other hand, the city doesn’t want investors buying the properties and fixing them up on the cheap with some caulk and paint, then, renting them out to anybody who shows up.

The city is working with non-profit organizations to handle rehabbing responsibly. It will attempt to encourage investors to be just as responsible, which means thorough rehabs, with an emphasis on high air-quality in the homes and environmentally sustainable insulation and windows and, finally, renting to responsible people. The investors who don’t follow the city’s wishes likely will be visited frequently by city inspectors.  

All of this underscores the fact that the foreclosure story of our times isn’t a simple American tragedy of dad and mom losing their jobs, then, their homes.

Any of us who grew up in the country saw evidence of that sort of sad tale. The Midwest plains are covered with deserted farmsteads. They are haunting reminders of dreams that were blown away by dust and other calamities.

There are, of course, those sorts of stories in the current foreclosure crisis, especially now with unemployment increasing.

But Chris Galler, of the Minnesota Realtors Association, said the reality is those sorts of foreclosures have always been with us. A hard-working family is beset by an unexpected problem — a lost job, an illness — and it loses its home.

 The current foreclosure problem is much bigger and far more complex than that. And it’s different problem from neighborhood to neighborhood, region to region.

There are staggering bottom-line numbers: In Minnesota in 2005 there were 6,500 foreclosures; last year there were nearly 30,000, about 18,000 of those in the Twin Cities.

But, for the most part, these Minnesota foreclosures don’t represent the sorts of foreclosures you see in Las Vegas and Phoenix.

“In places like that,” said Streitz, “you had massive overbuilding, miles upon miles of housing, prices starting at $390,000. It was a case of builders gone wild. There wasn’t the market to sustain that sort of building. Now, you can buy those houses for $69,000.”

You do see a small version of that sort of problem in outer ring suburbs in the Twin Cities. There are, said Streitz, instances in places such as Albertville and New Prague where builders put up 200 homes, but there were only 10 buyers. Now, the 10 who bought are stranded in a sea of empty homes that are in foreclosure.

The glut brings down the value of the homes that people did purchase.

Gallmon says there’s an even more common problem in the outer ring suburbs.

“Lot prices have come down dramatically,” he said. “In many cases, the prices of lots are down $30,000, $40,000, $50,000.”

That means people who bought a lot when prices were high and built a large house, will ultimately be surrounded by people who have bought lower-priced lots and, presumably, will build lower-priced housing. The people who bought high and built big won’t necessarily lose their homes, Gallmon said. But they will find themselves with “the biggest house” on the block, meaning the value of their home will decrease.

The Obama plan
So where does the Obama housing bailout plan fit into all of this?

Gallmon believes there will be little help for those caught up in the first round of foreclosures. Those foreclosures involved people, who for whatever reason, bought far more house than they could afford. They’re either already out of their homes, or beyond help.

It’s people at the cusp of foreclosure now who should get some assistance with the Obama plan, Gallmon said.

“The second round people are people who, in some cases, had funny-money loans and the interest rates are adjusted to go up in 2010,” he said. “They could get help with refinancing”

To stop, or at least minimize, a second wave of foreclosures is vitally important, Gallmon said, because it will help bring stability to the housing market sooner.

Gallmon believes holding down the foreclosures is particularly important in a state such as Minnesota, where population growth is slower than in other areas of the country, meaning fewer potential home buyers.

Most of the Minnesota non-profit agencies involved in attempting to help families facing foreclosure say that there is hope that the president’s plan will offer some help.

But this problem is incredibly complex. Even those who follow real-estate investment closely are wondering  if Obama’s plan can match up with the 21st Century real estate market. 

Bob Schnell, a partner at Faegre & Benson, is part of a working group at the law office staying atop the housing/investment issues as closely as possible.

Essentially, Schnell said, the president’s plan is based on two principles. First, it is supposed to be designed for people who are current on their mortgage payments but would like to refinance to get a lower interest rate. The problem is they can’t refinance because the value of their home suddenly is lower than their current mortgage. Schnell also believes the Obama plan will attempt to help people who, at no fault of their own, bought homes that now are worth less than their mortgages. This portion of the plan would actually lower the principle owed.

In all cases, the plan is designed to get help into the hands of home owners and renters.

“He [Obama] has made it clear he doesn’t want that help ending up in the hands of the speculators and the investors,” said Schnell, “but just how do you do that? The devil is in the details.”

Even 20 years ago, a massive federal plan would have been so much easier, simply because most of us borrowed money to buy a home through a bank or savings and loan and that institution held on to the loan, even had a longstanding personal relationship with the borrower.

In recent years, however, the lending institution held onto the loan for only two or three days before securitizing it into huge mortgage pools, which investors purchased at various levels of risk.

‘Financial engineering’
“This is a story of complex financial engineering,” said Schnell, a Princeton grad. “That’s a term you would not have heard 10 years ago. I read an article a few weeks ago saying there are now more people at Princeton studying financial engineering than there are regular engineering.”

In brief what this means is that the government can’t simply go to the local banker and order him or her to “fix this mortgage!”  The bank doesn’t own the mortgage. Thousands of investors do.

But step back from the incredible complexities of the problem and return to the Central Neighborhood in Minneapolis where foreclosure has become a way of life.

Finstad and Nompelis believe that there COULD BE a silver lining in the crisis.

The collapse of home prices means that the housing stock now is affordable for young, working families, the same sort of families who built these homes early in the 20th Century.  Those families could bring a new vitality and stability to a neighborhood that has often been troubled by such crimes as drug dealing and prostitution.

But they fear the opportunity could be lost.

Instead of attracting a new generation of homeowners willing to invest and live in properties that now are affordable, they fear much of the federal money will end up going through non-profits and quasi-public agencies that have their own agendas. 

“My concern,” said Finstad, “is that the federal money will come with strings attached. In a neighborhood like this, it will be used to create low income housing and we already have a huge concentration of poverty.”

His other concern is that speculators — far more savvy in how to deal with bureaucracies — will grab available funds before individuals, seeking to buy and occupy a home, can figure out how the system works.

That’s already a huge problem. Speculators, who have access to financing, already are grabbing up some of the best foreclosed properties in Central.

“This is a great opportunity for home ownership,” said Finstad. “This is an opportunity for those who want to return to the city. It’s a great location. It could be a great place to live. We need private investment.”

The city has set up programs to encourage individuals who want to purchase in neighborhoods on the North side or in Central.

But the person seeking to purchase a foreclosed, perhaps condemned, house in the city has a difficult time finding a bank or other lending institution willing to make a loan. Meantime, speculators sweep in. In some cases, speculators are willing to truly invest in a neighborhood. Too often, however, they’re looking for a quick profit, which is how the cycle began years ago. 

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.

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Comments (8)

  1. Submitted by Molly Priesmeyer on 03/02/2009 - 11:17 am.

    Great article, Doug. The speculators, and the lack of a city plan for combating them, is a major piece of the story that continues to get ignored.

    However, while a big part of the greed puzzle that caused this mess, speculators weren’t the biggest problem in Central and North Minneapolis. Both of these neighborhoods were targets of reverse redlining by financial institutions, which is evidenced by the disproportionately high number of subprime loans in those areas. And let’s not forget that the Twin Cities is highly segregated by race.

    A study last year found that nearly 50 percent of the loans on the North side were subprime, while the rest of the city was at 16 percent.

    And a recent study by the U of M found that blacks were five times more likely to receive a subprime loan than whites and Hispanics were four times more likely. So the real problem we’re talking about here is a lack of regulation and enforcement of fair housing laws that allowed institutions to engage in nefarious lending in the first place.

    To be sure, there’s a real fear that speculators will move in, not take care of the property, and the crime and drug issues will escalate. And there likely needs to be a plan in place that will at least try to stem that, particularly in neighborhoods receiving funds from HUD and the Neighborhood Stabilization Act.

    Yet those are funds awarded to the city to disburse, so it is up to the city to determine the criteria for how who will be awarded that money. And so far the city is awarding it to investors who are tearing down the properties, and there are few regulations in place to ensure what will be built will be sustainable and affordable for single families.

    In the end, it really is about creating affordable housing for everyone.

  2. Submitted by Craig Westover on 03/02/2009 - 12:31 pm.

    With all due respect, I am amazed how the “most severe financial crisis since the Great Depression” is explained by everything and anything other than fundamental economics.

    Doug writes:

    “In places like that,” said Streitz, “you had massive overbuilding, miles upon miles of housing, prices starting at $390,000. It was a case of builders gone wild. There wasn’t the market to sustain that sort of building….”

    Anybody asking why all those builders suddenly “went wild” all at once? A sudden binge of greed?

    Or might it have been the monetary policy of the Fed and government policy promoting homeownership artificially pushed down interest rates, which sent a bad market signal that misinformed builders by falsely indicating there were corresponding consumer savings to support that level of construction — the free-market cause of low interest rates — when there really wasn’t? You know — economics? Nahhh. It’s gotta be mass greed.

  3. Submitted by William Wallace on 03/02/2009 - 09:45 pm.

    If you think North Minneapolis is bad, check out Detroit.

  4. Submitted by Henk Tobias on 03/02/2009 - 09:46 pm.

    Great article Doug, well written and informative.

    Funny how poeple interpet these things through thier own personal prism. Some with thoughtful well argued facts and others with a reflexive responce to justify the un-justifiable.

    The Fed under Greenspan lowered interest rates, but it wasn’t about home ownership. It was about keeping the economy going. After the Tech Bubble burst near the end of Clinton’s term, Bush came into a sputtering economy, to get things fired up again Greenspan lowered rates and lower rates and lowered rates. This “cheap” credit was fueling our economy. As the housing bubble inflated and home prices soared Americans began using thier homes as giant ATMs. Refinancing homes to pull out the newly minted equity, lenders took advantage and agressively pushed the refi market, it all fed on itself and here we sit. And yes Greed had a lot to do with it.

  5. Submitted by Craig Westover on 03/03/2009 - 07:56 am.

    Isn’t that the point, Henk? The Fed was pushing down interest rates sending a false signal to the market that consumers were saving, which in fact was not true. Acting on that signal, industries took advantage of low interest rates to make capital investments in anticipation of future demand. These investments could not be sustained because, in fact, there were no savings.

    That is neither a greed problem nor a free-market problem. The cause and effect principles of economics functioned as reliably as the law of gravity. In this case, however, it was government (by manipulating the money supply) that dropped the ball.

  6. Submitted by Steve Schneeberger on 03/03/2009 - 08:41 am.

    You refer to the people who bought rental real estate as “speculators”, a term that has negative a connotation. I would call them investors.

    Investors buy something with hopes that it will increase in value over time. At some point in the future, they sell their investment and hopefully make a profit. In the meantime, these investors provide housing for people who can’t afford to own property themselves. Unlike a passive investment like stocks, rental property ownership demands active management; screening renters, collecting rents and maintaining the property.

    Your article seems to suggest that so- called “speculators” caused the current problems in the neighborhoods you discuss. Although it could be true in some cases, it’s unfiar to place the entire blame on these investors.

  7. Submitted by William Wallace on 03/03/2009 - 10:30 pm.

    Investors and speculators are different. A speculator buys something and does nothing but wait and sell. An investor adds value.

    P.S. Honk if you want me to pay your mortgage.

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