As a bill to help homeowners in foreclosure reaches the desk of Governor Tim Pawlenty, many doubt the bill will make it into law. Governor Pawlenty has repeatedly said he will veto the Minnesota Subprime Foreclosure Deferment Act because, according to his spokesperson, “it would negatively impact the credit market for the approximately 98 percent of homeowners not in foreclosure.”
In a letter submitted to the House of Representatives in April, industry representatives threatened to raise the price of credit – the rate of interest charged to borrowers, including mortgage holders – if the bill goes through, claiming it will harm their investors and damage lenders and investors confidence in loan contracts in Minnesota, making them unwilling to lend to subprime borrowers
Professor Prentiss Cox, of the University of Minnesota Law School and one of the bill’s authors, vehemently disagrees.
“These are the worst kind of false choices presented,” he said in an interview on Thursday. “It’s essentially class warfare.”
Palwenty’s office did not return phone calls requesting an interview.
Pawlenty is bowing to empty threats, Cox says, because the bill will deal with two kinds of mortgages that are now illegal in the State of Minnesota, and that are not related to the mortgages held by those 99% of homeowners not in foreclosure whom Pawlenty says he wants to protect. In short, Cox says, mortgage lenders will not be affected by the bill, and furthermore they have no power to carry out their threats.
Because of a law passed last year in the wake of the credit collapse, subprime loans and negative amortization mortgages are illegal to sell in Minnesota. Furthermore, the subprime market nation-wide has collapsed, making such loans virtually unavailable. These types of loans form most of the mortgages in foreclosure around the state, but the loans originated before the laws was passed. “How can you raise the price of credit that doesn’t exist,” Cox asked.
The only kind of interest rates lenders can now change are the so-called “prime rate” mortgages, issued to borrowers with good credit. If the companies who testified at the State House try to increase the price of prime credit without being forced to by changes in the economy, other lenders will offer mortgages at a normal, or “rational” price. Lenders who raised the interest rates on their mortgages will find themselves undercut by companies selling cheaper mortgages, and be forced to lower their prices to avoid losing their customers to their competitors.
The only way around this, said Professor Cox, is a highly illegal agreement between every lending company to keep prices artificially high to punish Minnesotans for not following their dictates.
By buying into the financiers’ empty threats, Cox said, Gov. Pawlenty is trying to divide the majority of homeowners from the 30,000 people per year facing foreclosure, up from 4,000 people per year in past years.
First, most people in foreclosure are not wealthy, Cox said.
Usually, people fall into foreclosure because they lose their job, or are overwhelmed by health bills. The dramatic increase of the past two years, Cox said, was “strictly a problem of mortgage origination.” He blames lenders for irresponsible and unfair lending practices, such as selling mortgages whose rates suddenly increase from the original rate the customer thought they’d be paying.
The onus should be on the lenders whose ill-considered practices led to a collapse of the market, Cox said.
In typical environments, more regulation means the average consumer will take some loss; however, this is “not a regular regulatory environment,” Cox said. “It’s damage control.” The bill’s proponents have been at pains to describe the proposed legislation as reasonable, limited, and not an additional regulatory burden. They say it would not penalize mortgage-holders with good credit.
The bill would give owner-occupants with sub-prime or negative amortization mortgages the option of applying to the state for an affidavit saying they have an illegal mortgage, says Barbara Jacobs of the MN housing project. The borrower then has to go through mortgage counseling, and can pay reduced installments for a year after the bill is signed into law.
Homeowners would still have to pay their full mortgage, Jacobs said, but they would be given greater bargaining power versus lenders, because they would be able to stay in their homes until a federal solution takes effect. That is much longer than the lenders would prefer, since any federal solution will be less profitable than seizing and auctioning off mortgaged properties, Cox said
For his part, Cox blames Pawlenty’s opposition on the governor’s Vice Presidential ambitions. The governor, he said, needs to make sure he has a solid conservative record in office.
“This is why he’s had three press conferences to say he’s in favor of motherhood, apple pie, and loan counseling.” Cox said. “Everyone thinks loan counseling is a good idea, but it’s only a first step.”
James Sanna (email@example.com) is an intern and writer at the Twin Cities Daily Planet