Foreclosure numbers too high, local experts say

A national housing data firm reported Thursday that foreclosure activity in Minnesota dropped nearly 16 percent in recent months, but other groups say the data is tainted.

The firm, RealtyTrac, said the 16 percent decrease occurred between December of 2009 and January 2010, though foreclosure activity was still up about 49 percent between January 2009 and January 2010. Some local housing experts have been skeptical of RealtyTrac's data; a report by local groups due out next week is expected to clash with the RealtyTrac year-end numbers.

Why the different figures? It all comes down to when a house in foreclosure is actually counted as being foreclosed.

A sheriff's sale is the point at which an owner typically loses the home to the bank. Ed Nelson of the Minnesota Home Ownership Center said a home should not be considered a foreclosure until the sale is complete.

"That, in most cases, is the definitive moment in time where that foreclosure has actually taken place," said Nelson.

Nelson said even though there are several prior steps leading up to the sheriff's sale, the house still belongs to the homeowner. He's critical of any other methods that would count houses earlier in the process.

"Rather than trying to count the process as it goes on, the number of steps taken, the actual transfer of title is probably the best way to say that foreclosure has really taken place," said Nelson.

RealtyTrac begs to differ.

"We define foreclosure as a process," said Rick Sharga, RealtyTrac's Senior Vice President.

RealtyTrac is an online marketplace of foreclosed properties and a prominent source of foreclosure data nationally, and takes a very different approach than the Home Ownership Center. RealtyTrac counts homes--starting at the earliest stage in the foreclosure process, from the moment public documents are available.

Sharga said that's the best way to get a handle on the amount of financial trouble in the housing market. He said only counting sheriff's sales can mask the problem.

Some homes in default or listed for auction might find their way into the federal Home Affordable Modification Program, or into individual lenders' modification programs. Others might get sold in a short sale, where the homeowner unloads the home for less than what she owes on the mortgage.

But Sharga says those programs often just delay a foreclosure rather than prevent it.

"We're seeing enormous redefault rates and failure rates on the modification programs," he said. "In a normal market, about one-third of homes that are modified redefault. Right now we're looking at 60-70 percent," said Sharga.

By capturing foreclosure activity prior to the sheriff's sale, Sharga said, you get a better sense of sheriff's sales to come.

Under RealtyTrac's definition of foreclosure, there was a sizeable increase in Twin Cities foreclosure activity in 2009. The numbers leapt 56 percent from the year before--that compares to a national jump of only 21 percent over the same period.

While some key players in Minnesota, including State Economist Tom Stinson, rely on RealtyTrac data, many local housing experts have questioned it. Critics describe RealtyTrac's methods as an undisclosed "black box." RealtyTrac's Rick Sharga defends their methods.

"When we're talking about having properties in some stage of foreclosure, we actually have the foreclosure notice that goes along with that proceeding, to make sure the data is as reliable as possible," said Sharga.

But RealtyTrac's critics say if the numbers are so reliable, they should track better with the actual number of sheriffs sales. A Twin Cities non-profit called HousingLink supplies the Minnesota Home Ownership center with sheriff's sale data from all 87 Minnesota counties.

And in the Twin Cities' seven-county metro area, those numbers suggest a decline in sheriff's sales last year, not the huge increase in foreclosure activity that RealtyTrac found.

Taking into consideration that the Home Ownership Center and RealtyTrac are looking at different things, you can carve out a subset of Realtytrac's statistics that is most like the local groups.' Compare them side by side, and you still get two opposing views of foreclosure trends. Ed Nelson from the Minnesota Home Ownership Center finds it odd that the numbers aren't more similar.

"One would assume that those numbers should be closer," Nelson said.

While Nelson disputes RealtyTrac's methods and results, he does agree with RealtyTrac's Rick Sharga that problems "farther upstream" in the foreclosure process are important warning signs. The Minnesota Home Ownership Tracks pre-foreclosure notices issued in Minnesota, and Nelson is concerned about the numbers.

"Both of our organizations are pointing to the fact that there's trouble on the horizon, that 2010 is very likely to be another difficult year for foreclosures in Minnesota," Nelson said.

The community affairs manager at the Federal Reserve Bank of Minneapolis, Michael Grover, agrees. Overall, he seems unbothered by the fact that the RealtyTrac and HousingLink data don't line up perfectly. He said both are useful to consider; neither is perfect. He looks at a whole range of data sources himself.

"We have no comprehensive data set that tells us about the borrowers, that tells us about the loans, and that tells us about the outcomes," Grover said.

But Grover said the key point is evident from the data that is available-- foreclosure activity is still at a very high level.

Many housing experts agree that means more work must be done to keep the tide from rising further.

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