Next Up: Foreclosure Mess Heading into Suburbs

The nation’s mess of growing foreclosures, often centered in urban and so-called exurban areas within key local housing markets nationwide, may be readying to make a move into the nation’s suburbs. That’s the conclusion of a new study published by the Federal Reserve Bank of Minneapolis, which found evidence that the housing stress typically associated with subprime borrowers in urban and exurban locales may soon head into more affluent suburbs in Minnesota’s Twin Cities area that have — so far — remained relatively more insulated from the nation’s housing crisis. Using data provided by First American LoanPerformance, the authors mapped 39,200 alt-A and 54,300 subprime loans in Minnesota using geographic information systems (or GIS) software. “When mapped at the ZIP Code level using GIS software, information about the status of mortgage loans … tell a more nuanced story,” authors Michael Grover and Andreas Lehnert wrote. Part of that nuance is an observation that even within the Twin Cities area in Minnesota, some significant differences exist in terms of housing duress — and where that trouble is likely to head next. Exurban areas, those located on the fringe of key metropolitan suburbs, were often the center of housing growth during the boom; not surprisingly, perhaps, the authors find evidence that the housing mess — particuarly for subprime borrowers, who often drove growth in such fringe areas — has taken its strongest toll to date in the so-called exurban fringe surrounding the Minneapolis-St.Paul area. It’s a pattern that so far has been repeated in numerous other local markets nationwide. In California, for example, Riverside and San Bernardino counties — on the eastern edge of Los Angeles’ suburban frontier — have been hit harder than more metropolitan areas immediately surrounding Los Angeles. But that may be be changing, Grover and Lehnert warn. At least in the Twin Cities area, they find evidence that loan delinquency patterns are moving towards the suburbs in what could be an ominous march towards the next stage of the nation’s housing mess. “Our analysis of the Twin Cities area reveals that delinquency rates were highest in suburban ZIP Codes outside of the two central cities, in communities as geographically varied as Forest Lake, Oakdale, and Lakeville,” they write. “In contrast, delinquency rates in the neighborhoods around downtown St. Paul and in portions of North Minneapolis were lower.” The finding matches a warning issued this past week by First American CoreLogic, which found that the risk of housing price declines and increased foreclosures in Southern California’s metropolitan hub of Los Angeles had soared during the first quarter of 2008. The analytics firm said that the Los Angeles-Long Beach-Glendale core-based statistical area now ranked as the second riskiest market in the state — and the second riskiest housing market in the entire nation, as well. In other words, the housing mess appears as if it may be moving from hard-hit inner cities and the exurban fringe towards more affluent suburbia. And with Alt-A performance continuing to decline at a record pace, the spread of the nation’s housing mess into key suburbs — where Alt-A lending was perhaps most prevalent — suggests more losses ahead for investors and lenders alike.