National Foreclosure Settlement 'Will not Have Major Impact' on Twin Cities Housing Market'

While it’s a step in the right direction, the recent $25 billion national foreclosure settlement is not expected to have a major impact on the housing market in the Twin Cities, according to an analysis released today by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business.

“The housing market will not see a meaningful recovery until the percentage of distressed sales returns to more normal levels,” predicted Herb Tousley, director of real estate programs at St. Thomas. He added, however, that “any programs that stem the tide of new foreclosures and short sales will help the housing market begin to return to good health.”

The Shenehon Center publishes a monthly Residential Real Estate Price Report Index that tracks the median prices and other data for traditional home sales as well as the two kinds of distressed sales: short sales (homes sold for a price less than the outstanding mortgage balance), and sales where the home’s mortgage has been foreclosed.

According to the latest index, just over 55 percent of all homes sold in the 13-county Twin Cities market were distressed sales.

This high percentage of distressed sales, Tousley said, has a dampening effect on the price of homes and is expected to continue throughout 2012 as lenders continue to process the large volume of properties now in the early stages of the foreclosure process.

The number of traditional (non-distressed) homes for sale in the Twin Cities right now is at a historically low level. In January there were just over 9,600 traditional-type homes on the market. Part of the reason for that is the seasonal nature of the real estate market, with fewer sales in the winter. But that 9,600 compares to more than 13,000 homes for sale in January 2010 and 16,500 in January 2009.

There is another reason for the low number of traditional homes on the market. There are two types of sellers. One group, for reasons such as a job transfer or short sale, must sell in a relatively short time. The other group, called discretionary sellers, would like to sell but are in no hurry. Right now the discretionary sellers are looking at the prevailing home prices and are opting not to put their home on the market until conditions improve.

The supply of homes will not increase to more robust levels, Tousley said, until the median price of traditional homes starts to improve and the discretionary sellers decide to put their homes on the market.

An analysis of the national foreclosure settlement, and what it means for the Twin Cities market, can be found on the Shenehon Center’s website.

“This settlement seems to penalize homeowners who have done the right thing and were able to stay current on their mortgages,” Towsley said. “They are able to refinance but are not able to reduce their principal balance if more is owed than the home is worth. Homeowners who are in default or at risk of default are able to reduce the principal owed on their mortgage.”

“With these terms, homeowners who have been making payments do not benefit as much as those who have not. They end up with a lower monthly payment but the same principal balance whereas those in default get to reduce the overall amount they owe.”

Tousley said the payments to foreclosure victims is puzzling.

“Giving $2,000 to someone who has been through the trauma of foreclosure does not even begin to cover their losses nor is it enough to help them move forward to re-establish themselves in a new housing situation,” he said.  “A $2,000 payment is better than no payment but it begs the question: ‘Why bother to do any payment at all?’”

He added that while the foreclosure settlement program might be a step in the right direction, it only covers a portion of troubled homeowners … those whose mortgages are with the five banks involved in the settlement. It does not cover mortgages sold by the lender to Fannie or Freddie, who control more than half of all outstanding mortgages.“In order to see big changes in the housing market,” Tousely said, “the needs of all troubled homeowners – not just those covered by five banks – have to be addressed.”

Research for the monthly St. Thomas index is conducted by Tousley and Dr. Thomas Hamilton, associate professor of real estate at the university.

The monthly index is available free via email from Tousley at