It seems that every week brings new proposals aimed at stemming the tide of foreclosed and abandoned homes. But aside from new predatory lending laws, most of the solutions for strapped homeowners have been met with stiff opposition. Foreclosure packages at the federal level are being hashed out this week, each day bringing new provisions and exclusions, often at the behest of the financial-services industry. It could take months until anything resembling relief is finalized, and even then implementation is unlikely to be swift.
In Minnesota, Sen. Ellen Anderson (DFL-St.Paul) and Professor Prentiss Cox, a former assistant attorney general who teaches at the U of M and specializes in consumer issues, have a plan to ease the foreclosure crisis in Minnesota until a federal package is enacted. They’ve worked to create the Subprime Foreclosure Deferment Act (SF3396), which would keep more than 15,000 Minnesotans from losing their home.
The bill’s premise is fairly simple: Homeowners must have a subprime or negative amortization loan; it must have been originated before August 1, 2007; it must be for an owner-occupant property; the owner must have lived in the residence six months prior to foreclosure, and intend to live there for the duration of the deferment period. If they meet these criteria, homeowners then must file an affidavit for foreclosure deferment with the lender, and then pay either 65 percent of the payments due when the homeowner defaulted, or the minimum monthly payment when the mortgage was first created, whichever is less.
In other words, they’re required to pay their mortgage. There’s no money given for relief. The bill simply gives homeowners the ability to negotiate a plan with lenders, most of whom have been unwilling to compromise in the face of the mortgage meltdown and credit crunch.
But like most immediate homeowner help, the bill also faces opposition, chiefly in the person of Tim Pawlenty. The governor has said he’d “probably” veto it because it might scare aware lenders and dry up credit. Prentiss Cox says that’s ludicrous, and that Pawlenty is being swayed by the industry that caused the problem in the first place.
Cox talks to Minnesota Monitor about the bill and why it’s important that plans at the state and federal level get passed into law now.
Minnesota Monitor: There are so many proposals at the state and federal level regarding foreclosures. It’s hard to keep track of what’s next and what’s in the works and what each bill is about. Can you explain the goal of the Foreclosure Deferment Bill?
Prentiss Cox: With the current foreclosure crisis, you have long-term, medium and short-term. In the long-term, we’ve shut off the underlying problem. The creation of the situation. Now that assumes we don’t have an economic crash that everyone seems to be talking about. What caused this crisis in the potentially long term has been shut off.
In the medium-term, there is going to continue to be a wave of foreclosures and probable foreclosures. There are increasing tools to try to deal with this that are just proposals. Nobody has enacted anything to really help people in foreclosure. It’s sort of all these big notions that aren’t being implemented.
So that’s the genesis of the deferment: We just have to freeze the situation for people who have a realistic chance of prevailing at the other end versus kicking them out [of their homes] because people are talking and not doing.
That’s why I think the deferment is so important at the state level, because there are no solutions now. And that would help prevent more abandoned property by keeping a certain percentage of people in their homes.
MinMon: So there’s relief for subprime borrowers. But what about the second wave of foreclosures we keep hearing about, the Alt-A or no-interest mortgages that have yet to peak?
Cox: The negative-amortization proposal [in the Subprime Foreclosure Deferment Bill] was aimed at those. That’s the most common type of Alt-A mortgage, the option ARM with the negative amortization. So the deferment was also aimed at that group.
What’s going to happen with those loans is a little trickier, for a few reasons. One is, they are more geographically spread, so you don’t get this concentration in areas where property values are plummeting by huge numbers. That changes it a little bit. They aren’t as likely to decline as rapidly. When you have a property that goes on sale in a nice area of Golden Valley, it’s likely not likely to become abandoned and vacant relative to the chances of that [occurring] in a poorer area.
MinMon: And most of people with Alt-As have higher credit. If they aren’t in negative-amortization, is it likely they will refinance if their home values haven’t declined too much?
Cox: They have more chances to refinance and get out of these situations that way. But that’s kind of a question mark. We still don’t really know how or if these people will be able to get out of these situations yet.
So the two options you have are to refinance or sell when your mortgage payments exceed what you can afford. And unless we get some help in these developing federal solutions, you’re down to refinancing or selling. And Alt-As have a better chance on both ends. So you will probably see a higher percentage of Alt-As that default work their way out. But the question is, are we talking about 20 percent or 80 percent that go from default to foreclosure? And that we don’t know.
MinMon: What is right and wrong about some of the proposals at the federal level? What have been some of the main issues that might not be at the forefront of discussions in the press, but still matter in staving off the growing crisis?
Cox: The better proposals are really good. I just don’t know what their chances are of passing in the current environment. The better proposals are the bankruptcy reform, which would allow bankruptcy judges to do enforced loan modification. And the FHA financing reform that makes the new FHA money contingent on loan restructuring and writedowns, and putting loan loss at the back of the loan and sharing equity.
MinMon: The federal housing stimulus package presented by Sen. Christopher Dodd on Monday did not include the bankruptcy provision. Can you talk a little about how and why that happened? Is it purely banks’ disdain of the provision?
Cox: My understanding is that the bankruptcy provision was taken out of the package that went to the floor, but there was an agreement that the Republicans would not invoke cloture on a vote to add bankruptcy reform as an amendment. The current status is that the amendment was raised and tabled, and the prospects for passage in the Senate do not look good.
The current Senate bill is what could be obtained over the objections of Senate Republicans, who were prepared to filibuster the bill that contained substantial mandatory remedies. The financial services [sector] may be the most powerful lobbyist, and [is] certainly one of the most prolific campaign contributors in Washington.
The bankruptcy provisions would eliminate the current prohibition on bankruptcy judges making loan modifications in residential mortgages, as these judges can do with commercial mortgages. There is an irony in the Senate refusing to enact this provision, given the wholly lopsided bankruptcy re-write in favor of the financial services industry in 2005.
MinMon: You mention the uncertainty of these bills passing in the current environment. Governor Pawlenty has said he would likely veto the Foreclosure Deferment Bill because it would affect credit elsewhere. Is there any way helping these homeowners could freeze credit?
Cox: The governor’s initial position is something I really hope he reconsiders. It is sort of the worst knee-jerk doctrinaire conservative thinking about a problem.
First, he is just flat-out wrong. While it is often true that this type of regulation could result in [credit tightening], in this particular circumstance or crisis, that type of credit has already dried up due to abuses of the lending community. So they are no longer making the kinds of loans that are targeted here. Subprime securitized credit doesn’t exist, so it’s kind of hard to dry up credit that doesn’t exist.
Negative-amortization loans are illegal after our anti-predatory lending law that the governor supported that was passed last year. So I am a little mystified how you dry up credit that doesn’t exist.
I think this is a really bad approach because it is both false and divisive. It’s creating fear among the average homeowner that somehow this modest approach to helping homeowners in crisis is going to hurt them. And in this environment — with this targeted approach, and with collapsed credit already in those areas — it’s just simply false.
MinMon: Pawlenty also announced last week, when he said he’d veto the bill, that there would be money instead for loan counseling. But is that even an issue given the new loan parameters?
Cox: We can all agree that loan counseling is good. But loan counseling doesn’t do any good if lenders aren’t willing to take losses and make serious loan modifications for people who are in this crisis. And most lenders are not willing to do that kind of restructuring without clout in the form of federal solutions or something else. And the [Minnesota] deferment bill itself would provide borrowers with some clout to enforce reasonable shared loss to loan modifications.
MinMon: Aside from Pawlenty’s stance, what has the biggest challenge with this bill?
Cox: You know, I am astounded that the American Securitization Forum, which is the trade association for these people who do these secondary mortgage loans — the governor is basically accepting their position on this.
And I gotta ask, Why in the world do they have any credibility at all? They just created this crisis through their lending practices, and essentially created a global financial crisis. They should be trying to clean up their mess. Not threatening us with false financial choices. It’s disappointing to see the governor accept their position on this.
Of course, the irony is, this bill doesn’t require any taxpayer money. This isn’t a bailout. This is just an attempt to freeze the situation to create a bridge to these federal solutions and keep as many people in their homes who have a realistic chance of retaining homeownership at the end of the crisis.
That contrasts with the $30 billion bail out of Bear Stearns, which I think was good policy, but that’s a $30 billion taxpayer bailout.
And how you can be silent about or support that, and then claim that this modern, targeted approach that’s going to help families in crisis and help stabilize the local real-estate market is somehow going to cause a credit crunch in the face of this $30 billion bail out? There’s a contrast there worth noting.
And the securitization industry, again, they should be contrite, not blustering.
MinMon: Isn’t this opposition to the bill part of what we’ve been seeing for decades, though? I mean, in some ways, this whole idea that government is bad, free-market is good — it’s an ideology versus a reality?
Cox: I hope that we are over that period. What I was assuming was that this crisis that was created by the lack of prudent regulation in an uncontrolled market would’ve been a clear wake-up call. So the position the governor was taking would be obviously discredited to everyone.
But it seems like we’re still stuck in that same debate. Which, to me, seems pretty divorced from what is happening. I am astounded that the language and the frame of this debate doesn’t just accept the reality that this was a situation of an uncontrolled market causing tremendous pain for everyone — homeowners, communities, real-estate professionals, investors — the whole range.
I think many of those industries and many politicians are still stuck in their reflexive opposition to any prudent government regulation of the market. And I think it’s time we got past that. I think it’s past that.
And if we can’t see that in this crisis, then I’m a little mystified as to what it would take to get people to see the consequences of continual deregulation of all aspects of economic life. It’s the archetype of why you have thoughtful government regulation.
I don’t think it can be too much clearer that the systematic attack on prudent government regulation caused this crisis. Maybe there will be another wake-up call after this, but I cannot even imagine what that would be.