Minnesota real estate mogul Steve Hoyt filed for Chapter 11 bankruptcy in late May. Hoyt is the CEO of Hoyt Properties, which operates out of Minneapolis. Hoyt listed assets of slightly over $30 million and debts of $54 million in his bankruptcy petition. When considering the magnitude of these numbers, the shocker is that the bankruptcy petition was for personal bankruptcy, not a corporate bankruptcy of Hoyt Properties. Thus, those dollar amounts reflect personal assets and liabilities.

Despite the recent downturn in the housing market, real estate is generally a lucrative business. As CEO of a major real estate development firm, Hoyt has been able to rack up quite an impressive amount of assets over the years — so much so that he makes enough in interest and dividends in one month for an average person to live off of for a year. Hoyt was making around $45,000 per month and most of this was passive income (investment income is considered passive, while money made at work is called earned income).

So if Hoyt has so much money, how could he possibly owe almost double that amount to his creditors? Basically, Hoyt used his assets (stock, etc.) as collateral for very large loans, which he did not fully pay back on time. As certain areas of his business investments went south, Hoyt took out more loans to refinance the original loans, just as some consumers attempt to use new lines of credit to manage their existing credit card debt. As is the case with many credit card holders, this tactic did not turn out well for Hoyt. Hoyt’s creditors now have the right to foreclose on his collateral. His main creditors are local banks, followed by private MN investors such as local businesses. Michael Meyer, Hoyt’s attorney, stated that Hoyt’s bankruptcy will allow him to protect some of his assets from these creditors (i.e. delay or prevent foreclosure) and to reorganize his liabilities.

Hoyt’s Chapter 11 petition alleged that the banks are acting in a heavy-handed manner because of all of the negative press and government scrutiny that they have received due to their poor lending policies. Hoyt’s allegation may appear to hold water with regard to some of the banks involved but it does not explain the actions of other banks. For example, American Bank of Saint Paul, MN and First Commercial Bank of Bloomington, MN were found to be in violation of banking regulations in 2009. In contrast, Commerce Bank has not been similarly sanctioned. Thus, it appears that Hoyt’s failure to pay back his loans on time is the root cause of his current situation.

Bank of America is the largest mortgage service provider in the United States. It has run into trouble lately for using shaky mortgages for mortgage-backed securities. Mortgage-backed securities are debt obligations that represent banks’ future income from a bundled group of mortgages. This income is dependent upon the borrowers’ payments. If the borrowers default, the securities lose value.

As a result of a lawsuit over the bank’s bundling of weak mortgages for securities, an $8.5 billion settlement has been proposed between the bank and some of its investors. The settlement, if approved, would be the largest of its kind in American history. If the proposal goes through, it could spell trouble for many mortgagees (i.e., borrowers). For mortgagees in less desperate circumstances, however, the settlement could bring good news.

The architects of the agreement have not yet laid out an exact threshold for qualifying for a loan modification. However, the industry standard is to allow modifications if the borrower’s modified payments will be thirty-one percent or less of that person’s gross income. The thirty-one percent cut-off is believed to be the payment amount that someone can handle reliably. After all, the goal of a loan modification is to make the loan manageable for the borrower so that the borrower does not default on the loan again.

As part of the proposed settlement, borrowers who do not qualify for loan modifications would likely lose their homes more quickly than they would have absent the settlement. The eviction process typically takes months, and so borrowers who are in arrears on their payments often continue to live in their homes despite being in foreclosure. Bank of America’s borrowers have been able to stay in their homes for unusually long periods of time because of the fact that Bank of America is overwhelmed with foreclosure paperwork. The settlement would force Bank of America to subcontract out some of their foreclosures to smaller companies, called subservicers, which would process the foreclosures more quickly.

Just how bogged down is Bank of America? Because Bank of America is so behind in processing its foreclosure paperwork, its average mortgagee is a year and a half behind in payments. Furthermore, Bank of America is almost one year slower at selling foreclosed properties than its competitors are, according to data presented in the settlement agreement. The data also suggests that Bank of America has not made as many loan modifications as its competitors have but executives at Bank of America argue that the opposite is true. According to them, Bank of America has made more loan modifications in the last three years than any other servicer has.

Northern Minneapolis has pulled through remarkably well from the recent tornado that killed two people, injured 50 and ravaged hundreds of buildings.  The residents and businesses of the North Side neighborhood came together and supported each other in the wake of the tornado’s destruction. Nonprofit groups also came to the rescue to help thousands of displaced residents obtain basic services and shelter. The already desperate foreclosure situation in North Side, however, has been exacerbated by the tornado because of questions of insurance and ownership over foreclosed properties that were damaged.

After the tornado passed, some local businesses offered food and electricity to displaced residents. Local government workers cleared a myriad of fallen trees from roads so that transportation could once again be feasible. In addition, the city of Minneapolis and the We Care, Northside! coalition of private and public organizations stepped in to help local residents pick through the deluge of services that descended upon the area. Some of these service providers were legitimate, such as nonprofit groups, licensed companies and government agencies. In contrast, others were taking the opportunity to prey upon the displaced residents of North Side. In an area already suffering from the effects of predatory lending, it is especially important to prevent further financial damage.

In addition to thousands of displaced residents, hundreds of buildings were damaged by the tornado. Of these, over 200 were bank-owned properties. State-chartered banks in Minnesota are required by law to maintain insurance on foreclosed homes but nationally chartered banks are not subject to the state requirement. As a result, foreclosed homes owned by nationally chartered banks may or may not have been insured against tornado damage. To complicate matters further, banks often sell their mortgages, and so it is not always clear which lender or lenders actually own a given property.

In addition, insurance does not necessarily cover 100 percent of the cost of a claim. As a result, banks wishing to repair foreclosed homes damaged by the storm may end up with out-of-pocket expenses even if the homes were insured against tornado damage. Depending on the amount of these costs, banks may decide that it is not worth it to repair the property. If a large number of banks choose to abandon damaged foreclosed homes, the cost of tearing down those buildings would fall on the city of Minneapolis. If the city does not choose to tear down or repair the homes, the area will remain blighted with abandoned and unusable properties, further driving down real estate values.

Under normal economic circumstances, banks typically sell as many foreclosed homes as they repossess. As a result of selling homes at the same rate at which they acquire them, lenders do not build up an inventory of repossessed houses, otherwise known as REO (lender Real Estate Owned). In contrast, lenders today are repossessing so many homes because of the wave of foreclosures that they cannot sell those homes as quickly as they are acquiring them. For example, a recent New York Times article reports that mortgage lenders in Minneapolis are now repossessing six homes for every one foreclosed home that they sell. This has led to a large build-up of REO homes on the market.

Because banks are normally looking to recap their losses from unpaid mortgages as opposed to selling their properties at top dollar, the housing market is now flooded with under-priced real estate. This in turn is driving down real estate prices and is preventing the housing market from rebounding to the extent that many had hoped it would this year. How can you expect to sell your home at a reasonable price when your neighbor down the street has foreclosed on his or her home and your neighbor’s mortgage lender is now selling that home for a fraction of its value?

Problems abound not only for people trying to sell their homes but also for banks. In short, it costs money to maintain an inventory, whether that inventory consists of REO properties or widgets in a factory. While foreclosed homes don’t need to be warehoused the way that retail items do, there are still costs associated with maintaining a large inventory of real estate. For example, banks need more staff members to manage their large backlogs of repossessed properties. Those additional employees cost money in the form of salaries, benefits and administrative costs. And these costs add up, even for a large company like a bank. In fact, Trepp, a real estate research company, has estimated that the backlog of foreclosed homes could cost banks up to $40 billion.

These costs are in addition to the losses that banks are suffering from not being able to process foreclosure paperwork in a timely manner. A bank won’t be able to sell a property if it hasn’t even finished processing the associated foreclosure paperwork. While it will take a least a few more years for banks to clear their inventory of REO, lenders are expected to make significant progress this year and next with regard to processing foreclosures, modifications and short sales.

U.S. Bank, based in Minneapolis, recently agreed to pay the U.S. Department of Housing and Urban Development (HUD) $1.2 million in a settlement regarding 27 mortgages that U.S. Bank processed in violation of Federal Housing Administration laws. Specifically, U.S. Bank included overdue amounts and associated late fees in their calculations of refinanced mortgages even though the inclusion of these amounts is prohibited. While U.S. Bank did agree to settle the case with HUD, that settlement did not include an admission of guilt.

With assets worth $291 billion, U.S. Bank is one of the largest housing lenders and commercial banks in America. The company is responsible for faulty mortgages that cost HUD almost a half million dollars when the mortgagees responsible for paying back those loans defaulted on their financial responsibilities. HUD insures mortgages in order to encourage lenders to invest more of their assets in other loans instead of holding those assets as back-up funds in the event that mortgages fall through. Because of this, unpaid mortgages insured by HUD come out of HUD’s pocket instead of the lenders’ coffers.

While many analysts have suggested that mortgage fraud and errors have spiked in the recent recession, the mortgages in this case were issued a few years before the recession hit. Faulty mortgage paperwork and foreclosures have been substantially more prevalent, however, during the recession. Foreclosures are occurring almost four times as frequently as they did only a few years ago. In addition, an increasing number of banks is being investigated for inaccurate mortgage paperwork and for faulty procedures in processing that paperwork.

On the flip side of the story, HUD is being sued over its mortgage practices. Couples who took reverse mortgages (cash payments in exchange for home equity) are alleging that HUD violated federal rules with respect to how it handled each reverse mortgage when one of the spouses died. For example, some of the displaced homeowners allege that HUD changed the terms of their reverse mortgages in such a way as to decrease the protections of the surviving spouses. As a result, the surviving spouses are now losing their homes to foreclosure. So, if these allegations are true, the federal agency dedicated to making homeownership affordable and secure has also been responsible for some older Americans losing their homes.

Because of the recent wave of foreclosures, many areas of Minneapolis are now blighted with deteriorating homes. These homes are not only very difficult to sell but they also depress real estate values around them. The reasons for this are multifaceted but a primary factor is that real estate tends to be worth less when dilapidated properties on the block are an eyesore to homeowners.

Earlier this year, the city of Minneapolis was more optimistic regarding its real estate market but recent data shows that the market has not stabilized yet. The Minneapolis Area Association of Realtors reported that the North and Phillips listing regions had sales price increases of 19.6 percent and 21.6 percent, respectively, compared to last year’s prices. However, more recent sales data shows that those gains have been completely erased in Phillips and virtually erased in North. In both areas, homes are still worth only a fraction of their values from five years ago.

In addition, foreclosed homes on the block often make potential home buyers wary of buying homes on that block because the sight of dilapidated properties implies that the area is going downhill. Lastly, uninhabited buildings are prime habitats of illegal activity, such as drug dealing, because they provide privacy for those activities without supervision. As a result, the city of Minneapolis has both financial and law enforcement incentives to help these properties sell.

To give the local real estate market a boost, the city of Minneapolis recently hosted an open house tour of its recently revamped properties in some of the poorer sections of the city. The tour covered two dozen homes in the North Side region as well as 17 on the South Side.

Minneapolis offered potential buyers financial incentives to buy one of the homes on the tour. For example, anyone buying a featured home would be given $1,500 to help pay for closing costs and other fees. The city also offered low-interest financing to qualified buyers. This is especially important nowadays because many banks are reticent to loan money to potential home buyers in light of the recent mortgage crisis. As a result, a substantial number of people who would like to buy homes right now cannot because they have not been able to get mortgage loans. This, in turn, has hurt the real estate market this year. For example, home sales in MN were down twenty percent in April and selling prices fell accordingly.

The mortgage crisis has gotten to be so bad that some buyers are turning to their sellers for financing. This arrangement turns the sale into more of a rent-to-own situation, except that the buyers are the legal owners of the home from the time of sale rather than having to wait until they pay off the entire loan. Buyers with poor credit are particularly likely to seek seller-provided financing, otherwise known as owner financing, because it would be nearly impossible for them to get a loan from a bank. While many of these buyers are still on shaky financial ground, they do not wish to wait until they can improve their credit because, by then, real estate prices are likely to have bounced back and they will no longer be able to get properties at rock-bottom prices.

Most sellers are not comfortable acting as lenders and many simply do not have the financial luxury of being able to wait that long to be paid. Sellers using their properties as collateral for loans are at particular risk in these situations. The reason for this is that many loans contain a clause in which the bank has the right to demand the balance of the loan upon sale of the property. If the seller has to wait years for the buyer to pay him or her in full for the property, the seller will probably not have enough liquid assets to pay off their own loan if it is called by the bank. However, with so many homes languishing on the market for years, an increasing number of sellers is willing to participate in seller-provided financing.

While seller-provided financing may sound odd, it was actually fairly common 30 years ago, albeit for different reasons than it is now. The mortgage rates in the 1980s were typically between fifteen and twenty percent, which led many buyers to seek alternative lenders. A portion of these buyers was able to secure loans from their respective sellers. Nowadays, buyers are seeking financing from their sellers because that is often their only option. Mortgage loans are so difficult to obtain that home sales in Minnesota declined twenty percent in April, which in turn hurt selling prices.

Some real estate entrepreneurs see this situation as an opportunity. By specializing in owner financing, these sellers are able to practically monopolize a market (i.e., buyers with poor credit) that is otherwise untouchable by anyone requiring a traditional mortgage. Because seller-provided financing is so risky and often does not involve the use of collateral, sellers using this method should either avoid having loans on the properties or be able to repay those loans without relying on funding from the buyers.

According to a Star Tribune article by Jim Buchta and Jennifer Bjorhus, Cynthia Strand, a real estate professional operating out of Forest Lake, has been fined $420,000 by the Minnesota Department of Commerce.  Strand has been charged with embezzling approximately $1.3 million over the course of over thirty real estate transactions.  The money in question was earmarked for mortgage payments and various fees associated with the transactions.  Rather than using the money as it was intended, Strand transferred it to her personal bank account and the accounts of companies operated by her and her husband.  As a result of the unpaid mortgages and fees, some of Strand’s clients have incurred substantial financial losses.

Strand’s company, Strand Closing Services Inc., filed for bankruptcy last year but was unsuccessful in doing so.  According to the bankruptcy filings, Strand’s company had about a half million dollars more in liabilities than in assets.  However, if the charges against Strand are true, then most of those liabilities stem from the $1.3 million that Strand used for personal purposes rather than paying off the company’s debts.  Accordingly, the bankruptcy was denied on account of the charges against Strand.

The Minn. Department of Commerce began their investigation of Strand in 2009, when a bank reported that Strand Closing Services failed to use loan money for its intended purpose of paying off a mortgage.  Similar complaints followed.  Two from Forest Lake, MN claimed that money made available at Strand’s property closings should have been used to pay off mortgages and related fees, but was not in fact used for those purposes.  Many of the other claims stem from properties in the suburbs of Minneapolis and St. Paul.

Strand has been charged with racketeering, theft, failure to document title changes, insurance fraud, failure to pay title insurance premiums, concealing criminal proceeds and aggravated forgery.  In addition to the large fine, Strand’s professional licenses have been revoked.  Strand has 30 days from the imposition of the penalties to request a hearing to review them.

Unfortunately for homebuyers in Minnesota, Strand’s case is not unique.  Other Minnesota real estate closers have been charged with embezzling money from escrow accounts and similar allegations, particularly after the real estate market crashed.  The Minnesota Association of Realtors has been encouraging government regulators to revise the relevant laws in order to make it more difficult for these transgressions to occur.

According to a TC Daily Planet article by Bruce Johansen, the recent recession has necessitated budgetary compromises that have left little room for the further cuts that will almost certainly need to be made over the next couple of years. Both of the Twin Cities will face budget cuts that could seriously affect the quality of public services and infrastructure such as the police force and road maintenance. In Minneapolis, the situation is more controversial because of public concern over ever-increasing property taxes and heavily decreased funding for neighborhood revitalization programs. In contrast, Saint Paul’s proposed budgetary plan does not include large increases in property taxes or an end to community funding. Property taxes may still need to rise, however, in order to adequately fund public schools. Officials and residents of both cities are concerned over the compromises that will have to be made in the Twin Cities’ budgets over the next couple of years.

When looking at the budgets of Minneapolis and St. Paul, the areas of highest spending include municipal employee salaries, pensions, public safety, road maintenance and other transit-related expenditures. Because property taxes make up an increasing portion of city revenue, many residents and analysts worry that, absent a draconian increase in property taxes, vital public services will not receive enough funding. As a result, the standard of care associated with these services (such as the prompt repair of potholes, the response time of emergency services and the extent of snow plowing) may diminish.

On the statewide level, Governor Mark Dayton has attempted to prevent excessive cuts to municipal government funding. The amount of money flowing from the state government of Minnesota to counties and cities within the state has already diminished over the course of the recession, and so any further cuts must be carefully considered.

Federal dollars are few and far between as well. The federal Community Development Block Grant program funds urban projects such as low-cost housing and career training for people in lower income brackets. Some members of Congress would like to end this program by the end of next year. Similar programs, such as AmeriCorps and Head Start, which channel federal dollars into local projects, are also at risk. In response, many local officials have protested vehemently. However, until the economy rebounds and more individuals and businesses are paying taxes on their earnings, tax revenue to local, state and federal governments will be relatively low. As a result, officials are between a proverbial rock and a hard place with regard to raising taxes or cutting spending.

According to The Minneapolis Area Association of Realtors, the median home sale price in the Twin Cities region increased 2.3% in 2010, with detached single-family home values in the Saint Paul/Minneapolis metro area rising 2.8%, and condos and townhouses losing 3.5% of their market values.  Last year’s modest increase in real estate values likely signals the beginning of a reversal of the recent downward trend (Twin Cities home values plummeted 28% between 2006 and 2009).  In fact, the region’s real estate values are expected to increase slightly in 2011.

These figures are particularly encouraging when compared to national data reported by Fiserv, an organization that compiles and analyzes information on real estate values.  Single-family home values fell 1.5% nationwide between the third quarter of 2009 and the third quarter of 2010.  Furthermore, Fiserv predicts a 5.5% decrease in housing values between the third quarter of 2010 and the third quarter of 2011.  Real estate values have been falling for the last five years, and in the three years leading up to the third quarter of 2010, American home values plunged 24.7%.

Amidst the gloomy national real estate forecast shines a ray of hope.  Fiserv’s report predicts that housing prices in most major metro areas, including St. Paul and Minneapolis, will stabilize by the close of 2011.  According to the Fiserv/Case-Shiller indexes, less than 25% of American metro areas currently have stable or increasing home values.  Even in some cities where the real estate markets have shown signs of stability, home values have not yet shown a corresponding rebound.  Experts attribute this to the larger-than-average number of foreclosed properties available at discounted prices.  By the third quarter of this year, the percentage of American metro areas with stable or increasing home values is expected to more than double.  Approximately 75% of metro areas are predicted to have stable housing prices by the end of this year, while virtually all metro markets are expected to stabilize by the end of 2012.

Fiserv’s report covers almost 400 U.S. housing markets but is limited to single-family homes.  Fiserv’s reports and projections are based on their Case-Shiller indexes in conjunction with real estate sales data from the Federal Housing Finance Agency (FHFA).