The Mortgage Meltdown

Foreclosure mediation, relief for the 'little guy'

  • Article by: H.J. CUMMINS , Star Tribune
  • Updated: March 23, 2011 - 1:11 PM

Under the plan, like one for farmers in the '80s, troubled borrowers could get a chance to renegotiate mortgage terms.

Lenders would be required to offer Minnesota homeowners a chance at mediating their way out of foreclosure under a plan proposed Thursday by Minnesota Attorney General Lori Swanson.

The Homeowner Lender Mediation Act, patterned after a program from the mid-1980s that helped about 14,000 Minnesota farmers stay on their land, would put a foreclosure on hold for three months if a borrower asks to renegotiate mortgage terms to an affordable level.

At a Capitol news conference, Swanson called it relief for the "little guy" -- squeezed by job losses and expensive necessities and largely left out of a $700 billion federal bailout for the financial industry. She also called it fundamental to stemming the devastation brought on struggling homeowners and their neighborhoods because, she said, the state is on track to lose 30 percent, or $70 billion, of its collective home values by 2010.

The state's bankers, calling Minnesota's foreclosure process one of the longest and most consumer-friendly in the country already, questioned the need for Swanson's plan.

Steve Johnson, a spokesman for the Minnesota Bankers Association, also said there are already many federal assistance programs, and he expects more under the incoming Obama administration. "I don't know why we should get out ahead of the feds," Johnson said.

Rep. Debra Hilstrom, DFL-Brooklyn Center, also on hand at the Capitol news conference, said she will sponsor the proposal in the coming legislative session.

How it would work

The act would generally follow the same process as the Farmer Lender Mediation Program, as described by Swanson: Before any foreclosure, a lender would have to notify borrowers of their right to mediation. The borrowers then have two weeks to request it, and the two sides must meet within 20 days of that.

Terms up for negotiation could include lower interest rates, principal forgiveness or lengthened payment schedules.

Every threatened Minnesota homeowner can ask for the mediation, but Swanson could not say how many in this year's 28,000 foreclosures would have asked, or would have qualified even for reasonably reduced payments.

A core, and likely controversial, feature of the proposal puts the burden on lenders to come to the table able to negotiate terms on all mortgages, including those that have been sold off in bundles to investors. Lenders have repeatedly said they can't alter those loans because they no longer own them.

"We're saying, 'If you're going to use our foreclosure system, you have to show up armed with full negotiating authority,'" Swanson said.

Voluntary mediation success

Swanson said success in her office with several voluntary mediations shows the process' potential to keep families in their homes and help lenders recover the most money.

Lisa Haluptzok, her husband and their three children were going to lose their house in Wyoming, Minn., this summer after the interest on their 2006 mortgage adjusted up from 6.53 percent to 10.35 percent. That raised their monthly payments from $1,800 to $2,600.

They couldn't refinance, Haluptzok said, because five empty, foreclosed houses in their neighborhood brought down the value of their house. But with mediation, the lender agreed to a 30-year fixed mortgage at the original 6.53 percent interest rate. "It saved us," she said.

The Hilstrom bill, and its Senate companion, will be the second run at homeowner relief by the Legislature.

The two houses last session approved one-year deferments on subprime foreclosures, later vetoed by Gov. Tim Pawlenty. But Pawlenty said at the time that he could support something like the earlier Farmer Lender Mediation Program.

"We're hoping to take him up on that," Hilstrom said.

H.J. Cummins • 612-673-4671

  • about this series

  • This is an occasional series examining the effects of the collapse of the housing market.

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