Minneapolis, Minnesota Business Litigation Blog

Homeowners are still hurting in the aftermath of the Great Recession and the real estate downturn that went along with it. In the Twin Cities area and across the country, many homeowners are underwater on their mortgages. Others are not only underwater, but behind on their payments and facing foreclosure.

In short, it's still tough out there.

It isn't only homeowners who are hurting, either. So are many homeowners associations in Minneapolis and elsewhere. Associations are increasingly dealing with members who are frustrated on many levels - starting with the fact that their dues are going up while the values of their units goes down.

In most respects, the purpose of homeowners associations remains the same, despite the downturn in the market. Associations collect dues from residents to take care of common needs like lawn mowing and snow removal. They also create and enforce rules on use of individual units, such as whether residents can have pets, put up gaudy holiday lights, or rent out their units to others.

How far can local governments go in controlling the number of housing units that are devoted to rental housing? In the last five or six, years, the issue has kept coming up - and not only in college towns. The most recent instance was in not in a college town but in a developed suburb, West St. Paul.

As Minnesota commercial zoning lawyers, we know the importance of making sure property rights are protected in these cases.

In 2005, Winona, home to Winona State University, passed the first ordinance restricting the percentage of rental units on certain blocks. The figure was set at 30 percent on those blocks.

Northfield, the home city for St. Olaf and Carleton colleges, followed with a similar ordinance in 2007. Residents had complained of issues with excessive noise, inadequate parking and unsightly litter in areas of the city with large concentrations of rental housing. Northfield's ordinance capped rentals at 20 percent per block.

Mankato, the site of Minnesota State University, was next. Its ordinance involved a 25 percent cap on rentals.

Now it's West St. Paul. In September, the city council passed an ordinance limiting rentals properties to 10 percent on certain blocks. The ordinance is due to take effect on January 1.

The real estate slump has been tough all over the country. Prices have dropped, foreclosures have mounted, and there's been plenty of pain to go around.

Nationally, it's been especially tough in overheated markets like Miami, Las Vegas and Phoenix. Could it really be, then, that the Twin Cities real estate market is down the most of any in the country in the U.S.?

That's what data from Standard and Poor's Case-Schiller index indicates. The index sows prices in the Minneapolis area to be down 9.1 percent from a year ago - more than anywhere else in the country.

The good news is that, over this past summer, Twin Cities home prices did increase. The increase of 9.0 from March to July was the second highest in the nation, according to the Case-Schiller index. Even when adjusted for season fluctuation, the increase in prices was over 2 percent. This was the second highest in the U.S.

The real estate market remains very challenging in most parts of the country. According to the New York Times, 14.6 million homeowners are "underwater" - owing more on their homes than those homes are worth in today's market.

The foreclosure numbers are frightening as well. The number of borrowers who have last homes to foreclosure is already nearly 6 million. And another 3.5 million homes are in some stage of foreclosure proceedings.

It is scarcely surprising, then, in such a daunting market, that short sales are increasing. In the second quarter of this year, they accounted for 12 percent of home sales, up from 10 percent in the second quarter of last year.

A short sale is when a lender agrees to let a borrower sell the home for an amount that is less than the unpaid mortgage balance.

In many cases, homes that go by short sale remain occupied until they are actually sold. This tends to enable short sale properties to retain value better than foreclosed properties, which often sit empty.

A potential issue for sellers, however, is the possibility of a deficiency judgment by the lender against them. That issue is one that you should discuss with an experienced real estate attorney.

Don't be deceived by a brief lull in the foreclosure storm. With perhaps one in three American homeowners underwater on their mortgages, the steady stream of foreclosures isn't likely to end any time soon. Especially when the overall economy is this bad.

It's true that, from month to month, the number of foreclosures might go down a bit. But that is partly because the court systems in many states just can't keep up. Especially when those courts have themselves been hit with severe budget problems.

And then there is the problem of dubious banking practices. Consider the case of a married couple recently profiled in the Atlantic. Fred and Deana Dixon, of Massachusetts, sought to modify their home loan two years ago. Their lender was Wells Fargo, which of course is also a prominent player in the Minnesota mortgage market.

The fall-out from the housing crash continues in many different ways.

Foreclosures are still frequent occurrences, especially with so many people struggling in this tough economy. In Hennepin County alone, there were 475 foreclosures in June. Statewide, in the first quarter of 2011, there were 5,364. That's a lot of people losing their homes, and a lot of foreclosed houses pulling down property values.

With the severe slide in home values, many homeowners are underwater on their mortgages. This, in turn, can affect job mobility. After all, it's hard to move to a new place for a job if you can't sell your current house.

And then there is the ongoing reckoning with wrongdoing in the real estate industry that precipitated the housing slump and led to the Great Recession. One episode in this continuing saga was the announcement that Well Fargo will pay an $85 million dollar fine to the Federal Reserve for improper practices in its mortgage business.

Seniors should be wary of reverse mortgages. They are marketed as a way for people to create a revenue stream for themselves by accessing equity in their homes. Lenders are supposed to be repaid upon the death of the borrower or sale of the home.

In practice, however, reverse mortgages can be a nightmare for elderly homeowners. This can happen, for example, when a married couple owns a home together and one of them dies. In the past, federal rules effectively required surviving spouses or heirs to pay off the full amount of the reverse mortgage - even if the value of the home had plummeted.

Because of the drastic decline in real estate values, this rule had the effect of facilitating many foreclosures. The Department of Housing and Urban Development finally rescinded the rule, under pressure from litigation brought by the AARP. But reverse mortgages remain a problematic financing form for many people.

America's largest banks are facing billions of dollars in lawsuits challenging the improper practices bank used pursuing foreclosure on people's homes.

Last fall, attorneys general from all 50 states and the District of Columbia began investigating these improper foreclosure practices after widespread reports surfaced about the banks' failures to meet legal requirements for documenting the right to foreclose. One issue was the use of "robosigners" - low-level employees who approved thousands of documents without even reading them.

There were also rampant problems with the way the mortgage industry used a recording system called Mortgage Electronic Registration Services (MERS). MERS made things easier for lenders by enabling them to record changes in ownership electronically, rather than going to county courthouses to do so. But this electronic system also enabled lenders to bundle and sell mortgages in dubious financial packages that were a significant cause of the financial meltdown in 2007.