Michael Grover - Assistant Vice President, Community Development
Published September 1, 2006 | September 2006 issue
Mortgage foreclosure rates rose in the late 1990s and hit new peak levels—at least by modern standards—in the early 2000s before declining.1/ Rising foreclosure rates coincided with the rapid expansion of subprime lending and widespread allegations of predatory lending, often in the same neighborhoods experiencing high rates of foreclosure. In some pockets of the Ninth Federal Reserve District, foreclosure rates have remained high; for example, an above-average foreclosure rate in Minneapolis earned the city a ranking in a recent Forbes.com article on "foreclosure hotspots."2/
Mortgage foreclosures present a problem for borrowers, the financial institutions that hold the foreclosed mortgages and the federal, state and local policymakers and nonprofit organizations that seek to aid homeowners in their time of need. To help borrowers, postpurchase support programs (PPSPs) created through public, private and nonprofit sector partnerships have developed. These partnerships exist in many, but not all, metropolitan regions around the country. The major PPSP in Minnesota, the Minnesota Mortgage Foreclosure Prevention Association (MMFPA) provides services across the state and was recently identified as a model of foreclosure prevention efforts.3/
In order to monitor foreclosure trends and deliver effective services, PPSPs need access to accurate, timely and inexpensive foreclosure data. Key points of information include the borrower's name; the lender and type of loan (i.e., home purchase vs. refinance), which can help PPSPs identify predatory lending patterns; and the street address of the mortgaged property. With the growing use and availability of Geographic Information Systems (GIS) software, comprehensive data tied to the addresses of foreclosed properties could allow groups to more easily identify and map existing patterns of foreclosures and, over time, distinguish new or growing foreclosure concentrations. With good data, PPSPs can be well-positioned to direct resources and bring public attention to neighborhoods and borrowers in the greatest need.
However, a recent analysis led by researchers at the Federal Reserve Bank of Minneapolis reveals that the availability and usefulness of foreclosure data are often inadequate, at least in the Twin Cities region. In addition, the information that is most useful for PPSPs—such as the current owner of the mortgage, the original purpose of the loan and the street address of the foreclosed property—is often the most difficult information to acquire. Here, we describe the challenges the research team encountered and offer recommendations for improving the usefulness and accessibility of foreclosure data, in the interest of enhancing current mortgage foreclosure prevention efforts in the Twin Cities.4/
In 2003, researchers from the Minneapolis Fed, Macalester College and the University of Minnesota collaborated to collect foreclosure sale data for the previous calendar year. One of the Fed's principal goals for this data collection project was to aid local foreclosure mitigation efforts by determining the spatial distribution and lender and borrower characteristics of foreclosure sale activity in Hennepin and Ramsey counties, the two core counties of the Twin Cities metropolitan area. More recently, the team analyzed 2005 foreclosure records as part of a follow-up effort to its earlier analysis, in order to draw comparisons with the 2002 data and identify developing trends.
The researchers obtained data for this effort from the sheriff's departments of both counties. The data appeared in documents generated at two key points in the foreclosure process: when an initial foreclosure notice was filed and when a foreclosure sale was recorded. To explain these two points in time, we turn to a brief timeline of the mortgage foreclosure process in Minnesota.
The mortgage foreclosure process is rather uniform from state to state, with slight variations. The procedure takes place at the county level but is guided, at least in Minnesota, by specific state laws. These laws outline the sequence of events and actions that need to take place for a foreclosure to happen. Here is how the process generally works in Minnesota.
A foreclosure action can begin as early as 30 days after a borrower initially misses a mortgage payment. The foreclosure officially starts when an attorney empowered by a lender executes and registers a power of attorney statement and notice of pendency against the borrower. The attorney then files a mortgage foreclosure sale notice, which is published in a local newspaper at least six weeks prior to the date of a sheriff's sale. The county serves this filing as a summons to the borrower four weeks prior to the sale date. At the sheriff's sale, the county sheriff sells the property to the highest bidder. A formal redemption period follows, which by Minnesota law can last six months, during which the foreclosed borrower can redeem the property by paying the amount of the foreclosure sale plus any accumulated interest, taxes, liens or fees owed on the property.5/ Even before the redemption process, the borrower can cure the default and reinstate the mortgage by paying all back payments, fees and expenses.
Data on individual mortgage foreclosures become publicly available when an attorney registers an initial foreclosure filing, and again when a foreclosed property is sold at a sheriff's sale. The data available at these two points in time are similar. By law, a foreclosure notice must specify:
The sale document includes all of the points listed above, plus information about the price that the property sold for at the sheriff's sale and the name of the individual or entity that purchased the property. In general, foreclosure sale documents provide more detail about individual mortgages than initial foreclosure filings do. However, foreclosure filings provide a larger pool of data, since there are more borrowers identified at the first point in the process. Before a foreclosure sale, some borrowers work with their lenders to stop the process and, as a result, not every property will be auctioned away.
For their analysis, Fed, Macalester College and University of Minnesota researchers relied on foreclosure sale records, which provided the most readily available and assembled information. (Foreclosure filings, on the other hand, required a lengthy review of all public notices published in local legal newspapers, so the researchers decided not to pursue that avenue of data collection.) In 2002, Hennepin and Ramsey counties collectively filed close to 1,200 foreclosure sales.
Collecting the 2002 data proved problematic from the start. Neither county had the sales records available in electronic format, so the 1,200 records were obtained as hard copies, with a per-document copying cost. The researchers had to carefully process the records before any analysis could begin. For example, the street address of the foreclosed property—the crucial piece of information needed to determine the spatial distribution of foreclosures—does not appear on the sales records, because lenders are not required to list it. The research team needed to match the legal descriptions of all 1,200 foreclosed properties to unique street addresses. After this step, the street addresses were geo coded. All of the other information on the sale document had to be manually entered into the database before it could be analyzed. Overall, this process took several months to complete.
The address of the foreclosed property was the most important piece of information for this research, but not the only one considered. The researchers also sought to identify other patterns in the foreclosures, such as the lenders involved, interest rates, mortgage riders or conditions and the dates of the mortgage originations. Additional, time-consuming data collection at the property-records departments of both counties was required in order to complete or revise the foreclosure sale records.
Two pieces of data proved especially laborious to confirm. First, it was nearly impossible to distinguish refinance from home purchase loans, even after reviewing mortgage documents filed at the counties' property-records offices. Second, it was difficult to determine who the lender of record was at the time a foreclosure sale occurred. For example, a small portion (roughly five percent in 2002) of the sale documents listed the Mortgage Electronic Registration System (MERS) as the lender.
A Virginia-based company, MERS acts as nominee in the county land records for the lender and the loan servicer, thus eliminating the need for these two entities to file assignments when trading loans. This service can make the process of trading mortgages on the secondary market more efficient. Unfortunately, it can also make the process of identifying the lender more difficult. MERS can appear as the record mortgage holder (i.e., the lender who commences the foreclosure), the purchaser of the foreclosed property, or both. MERS is not the only entity that obscures information about lenders; other financial entities, such as banks, often act as trustees in property transactions.6/ The researchers were able to resolve questions about most of the 2002 MERS-connected lending transactions, but only after additional review of county property records.7/
In the end, the research team gained access to sufficient data for the purpose of analyzing the spatial distribution of foreclosures in the Twin Cities.8/ Through the complications they experienced along the way, they also gained insights into how foreclosure data can be made more accessible and useful. Based on those insights, Community Affairs has developed the following recommendations. While we suggest serious consideration of these recommendations and believe their implementation could make local foreclosure prevention efforts more efficient and effective, we recognize that no analysis of the public- and private-sector cost of implementing these proposals has been completed. Furthermore, these proposals may require changes to policy and/or practice at several political or organizational levels, depending how local, county and state laws work together.
We recommend policymakers consider:
Making more data available in an electronic format. There has been little effort to make foreclosure records readily available to the public. During the early part of their initiative, the researchers spent considerable time entering information from paper foreclosure sale documents into an electronic spreadsheet linked to GIS and statistical software programs. In order to speed up this process, we recommend examining the pros and cons of making foreclosure filing and sale information available in an electronic format on a periodic basis, preferably on an easily accessible Web page.
Updating or adding key information to foreclosure notices and sales documents to make them complete. Addresses are not the only useful pieces of information in the foreclosure filings and sales documents. The growing number of transactions contracted through mortgage intermediaries, such as MERS, increases the need for accurate information about the lenders involved. We recommend considering the revision of foreclosure filing and sale information to provide more comprehensive, up-to-date data to the public, including updated information on the originating lender or the type of loan. Other data, such as information on interest rates and riders, would also be valuable to foreclosure prevention initiatives and analyses. Much of this information already exists at the county property-records departments and could be linked to foreclosure documents using the legal description or tax identification number of the property.
Maintaining a database repository of foreclosure notices and sales that contains historical and current records. At present, only sporadic research and data collection efforts on foreclosure patterns take place in most metropolitan areas. Therefore, subject to appropriate expenditure limits, we recommend the creation of a foreclosure database that would collect and maintain the information, both historic and current, that is included on the public filing and sale documents, augmented by additional information from the mortgage documents found at county property-records departments. Access to the database would be granted at least to public officials and nonprofit groups engaged in foreclosure prevention or mitigation activities. One possible location for this database could be the counties themselves, since they already maintain property-record files and, by law, collect foreclosure information.
In 2005, the Hennepin County Sheriff's Department made an important change in how it disseminates information about foreclosure sales. This first step should allow for greater public monitoring of the geographic pattern of foreclosure sales in the county and points to simple steps that other jurisdictions can take to help cultivate local foreclosure prevention efforts.
In 2003, Hennepin County foreclosure sale documents were only available in hard copy to the public. Starting in 2005, the sheriff's department posted information on monthly foreclosure sales on its Web site. In addition, it made select information on foreclosure sales available, upon request, in other electronic formats. While other data issues remain (e.g., MERS), the availability of recent foreclosure sale data in this format permitted a quick analysis of the geographic distribution of foreclosure sales. The analysis, conducted as a follow-up to our earlier efforts, took a day to complete instead of weeks or months. By simply contrasting the foreclosure sales that occurred in 2002 and 2005, as seen in the map above, we can visually determine if existing foreclosure hotspots remain hot, or if new areas have emerged. Clearly, with more annual data, the ebb and flow of foreclosures could be monitored more easily, allowing for more effective targeting and intervention of foreclosure prevention efforts.
1/ These conclusions are based on quarterly data from the Mortgage Bankers Association of America on the percentage of outstanding mortgages for which the legal process of foreclosure has been initiated but not yet completed.
3/ For more information about PPSPs and the MMFPA, see "Foreclosure prevention is Minnesota group's mission" in Community Dividend Issue 4, 2005.
4/ While we focus on the benefits of improving the availability of foreclosure data, we acknowledge that greater availability of data could have the downside of enabling foreclosure scam artists to more easily identify potential victims. For more information about state foreclosure statutes, visit http://ros.leg.mn/revisor/pages/statute/statute_toc.php and scroll down to Chapters 570–583, Compensatory and Collection Remedies.
5/ Minnesota law also allows for a 12-month redemption period for some properties with older mortgages and for agricultural properties.
6/ Mark Duda and William C. Apgar, Mortgage Foreclosures in Atlanta: Patterns and Policy Issues, NeighborWorks, December 2005, p. 26–27.
7/ MERS-related loan volume is growing quickly. When the researchers compared later records with the foreclosure sales records from 2002, the portion of foreclosure sale documents with MERS listed as the lender was much larger, with over one-third of the foreclosure sales in Hennepin County alone in 2005.
8/ The detailed analysis of foreclosure trends in Hennepin and Ramsey counties by the Minneapolis Fed is forthcoming. Maps for the 2002 and 2005 data completed by GIS students at Macalester College are available for download at: www.macalester.edu/geography/projects/courses/geog365/index.htm. For more information about the Minneapolis Fed’s foreclosure sale analysis, contact Michael Grover at 612-204-5172 or email@example.com.