Cities Working Against Themselves in the Battle Against Foreclosures

Minneapolis on the Decline: A Case Study

I have been following a fraud case that the city of Minneapolis has played a major role in. To be more exact, the Minneapolis City Council has been a driving force behind it. North Minneapolis has long been considered a high crime area and that part of Minneapolis is why the city has been nick-named “Murderapolis.” The foreclosure rate in the city has been setting new foreclosure records on a monthly basis and the abandoned houses that are left behind has caused a serious epidemic for the city to contend with.

Minneapolis is losing residents…Fast. The city has been very vocal with their efforts to get owner-occupied people to buy houses there to help solidify the city and rebuild the communities there. Most of the abandoned houses there have had the windows and doors boarded up to keep squatters from claiming a temporary place to stay. Even the city has acknowledged that the “squatters” are mostly “crack users” and with them comes the crime.

To summarize…Record highs in foreclosures has caused many homeowners to abandon their house. Cities have encountered increased crime with so many boarded up, abandoned properties. The Task: Do whatever is needed to entice people to buy and move into those abandoned properties.

The Cities want people to BUY the abandoned properties…BUY.

Cities such as Minneapolis are working against themselves, even though they claim to be working towards improving their cities as a great place to live.

That IS funny though and sure does make a press release sound good.

People Buying Houses Usually Need a Lender to FUND it.

Minneapolis, Baltimore, Cleveland and Buffalo are cities that have sued lenders that have foreclosed on houses in those cities. Those cities are claiming that the lenders are at fault for the abandoned houses and the increase in crime. Many of the houses the lenders own (REO – Real Estate Owned) are in rough shape and need to be fixed up. Historically, lenders sell their REO properties “as is” and have already lost a large amount of money and are not about to put more money into a house to fix it.

That makes sense. Properties like that are attractive to investors because they can represent a good deal.

It turns out, neighborhood associations in north Minneapolis approached REO departments of the lenders who own abandoned houses in that area. According to the reports, they “were unsuccessful” in buying those houses from the lenders. What does that mean? It means the city went to the lender and gave them a low-ball offer and the lender said, “No thanks.”

Cities can’t buy at a large discount so… Sue Them!

Those cities are losing the battle against crime and rather than increase their efforts to do something about it… They are opting to invest a massive amount of money into suing the lenders that own abandoned houses because, the lenders refused to sell to them.
That sounds pretty intimidating to a lender. They might see such a situation as “You can either sell us the house at a big discount or we will sue you because we feel the increased crime and run down houses are your fault.”

That sort of thinking is about as crazy as someone saying a mother is at fault for giving birth to her son, after her grown son did something wrong. After all, if that son had never been born, then he would not have done anything wrong.

I see two issues with those cities who are suing lenders.

1. It will (or should) deter would be home buyers looking to buy in those cities. If I was out shopping for a house and found out that the city has been suing lenders and claiming they are to blame for the crime & such… I would look elsewhere because if the city can sue a lender…What is to stop them from suing me and claiming that the reason houses are not selling on my block is because of the boat I have parked in my driveway?

2. What lender is going to want to give a loan to a buyer in an area where the city could sue them if they have to foreclose on that house?

I have never really seen a modern day “Ghost Town” but, if cities like Minneapolis, Baltimore, Cleveland and Buffalo don’t stop creating new “villains” to point the finger at, the problem will continue to get worse.

Here is a thought… Maybe those cities could try to accept responsibility for conditions they face and not blame every one else.

I hope the courts will rule in favor of the lenders with these lawsuits. If the courts side with the cities…parts of Minneapolis, Baltimore, Cleveland and Buffalo will become modern day Ghost Towns.

For a sneak peek, take a tour of north Minneapolis.

Welcome to Our Blog!
Welcome to the Real Estate Dispatch from BiggerPockets.com. Our blog brings together experts in various fields of real estate with the goal of keeping our readers informed and up to speed. Whether you're a real estate professional (lender, Realtor, banker, etc), investor (landlord, flipper, wholesaler, etc.), or simply a consumer, renter or homeowner interested in the world of real estate, this blog is the place for you to get involved!

You can subscribe to our RSS feed, get blog updates by email, join our free mailing list, or best of all, join our social network along with 35,000 others interested in real estate education, dealmaking, networking, and marketing.