Tornado complicates north side's foreclosure situation

Pat Paulson, a realtor with Exit Realty, recently sold a foreclosed home in north Minneapolis. But when a tornado pierced the home's roof with branches on Sunday, that killed the sale.

"It was on the market for only a few days before an offer was accepted," Paulson said. "Unfortunately, that buyer, because of the damage done to the house, has decided to back out of the deal."

Luckily for Paulson, the company managing the house and the lender that owns it are discussing an insurance claim to repair the property. For a lot of other bank-owned properties in north Minneapolis, that process will not be as easy. The tornado knocked down trees, tangled power lines and left more than 200 foreclosed and vacant buildings in limbo.

Those houses, already a blight on the area, are now presenting the city with a new set of problems. For many, a key issue will be determining who owns a damaged home, said Mark Kulda, vice president of public affairs for the Insurance Federation of Minnesota.

Kulda said many of the mortgages that have gone into foreclosure were packaged and sold to multiple owners.

"One of the main problems of this whole picture is that the actual ownership structure of all these mortgages is very unclear," he said.

That can make it difficult to identify who is responsible for a foreclosed property.

Determining if a house is insured also could be tricky.

According to the Minnesota Department of Commerce, state-chartered banks are required to maintain insurance on their foreclosed properties. But the rules do not apply to nationally chartered banks, over which the state does not have jurisdiction.

As a result, it's often not clear if those lenders have insurance on their foreclosed homes.

In Kulda's experience, many of the big institutions don't.

"I think for the larger lenders who are going through this, the chances of them buying an insurance policy is pretty small," he said. "They probably did something to assume the risks on their own. And if that's the case, there could be many properties in north Minneapolis that are not insured if they were lender-owned and vacant at the time."

But some real estate experts dispute that.

Rick Sharga, a senior vice president for the foreclosure research firm RealtyTrac, believes many lenders have liability or hazard insurance on the foreclosed homes. But he and Kulda both agree that figuring out the insurance question will require case by case assessments.

Even if a lender has insured a foreclosed property, that doesn't necessarily mean it will want to pay for tornado-related repairs, Sharga said.

"The real question becomes the costs of building the property versus what it would be insured for," he said. "It really comes down to an economic decision. The more it's going to cost the lender out of pocket, the less likely they are going to invest money in hopes of recouping something."

Under those circumstances, some lenders may walk away from the properties, potentially leaving the city to deal with them.

Minneapolis officials have held out hope that repairing or tearing down some of the tornado-ravaged foreclosed and vacant properties could help the city to eliminate some of the eyesores.

But if lenders saddle the city with the bill to raze those structures, the improvements could come at a big cost -- and result in a heap of litigation.

Sharga said there are still unsettled lawsuits going back and forth between insurance companies, lenders, and municipalities in Louisiana, nearly six years after Hurricane Katrina decimated homes there.

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