Marshall H. Tanick: Help for homeowners? There's legal precedent

A few items in this newspaper last weekend about the state's dismal housing market harked back to the dark days of the Depression. A pair of front-page news articles reported on a record-setting auction of 340 foreclosed homes in the seven counties surrounding the Twin Cities, among the nearly 9,000 foreclosed properties in the metro area, while an editorial admonished the Minneapolis City Council to refrain from a call for a voluntary three-month freeze on foreclosure of home mortgages ("Should Minneapolis freeze foreclosures?" Oct. 20). The three pieces recalled the crisis that Minnesota homeowners, urban and rural alike, felt during the 1930s and that resulted in a landmark ruling by the U.S. Supreme Court.

At the height of the nation's economic woes, three-and-a-half years after the stock market crash of 1929, homeowners across the country were losing their residences because they could not stay current on their mortgage payments. Declaring an "emergency," the Minnesota Legislature, a month after the inauguration of President Franklin D. Roosevelt, enacted a measure known as the Minnesota Mortgage Moratorium Law. The statute allowed state court judges, upon petition of homeowners, to temporarily halt mortgage foreclosures. It also extended for up to two years the time during which foreclosed homeowners could buy back, or redeem, their properties, provided that they continued to make "reasonable" monthly payments to be applied to their mortgage payments, real-estate taxes and insurance during the interim.

The measure was widely hailed as the type of bold legislation necessary to help overcome the throes of the country's economic catastrophe. But it ran into a problem under the U.S. Constitution: Article I, Section 10, one of the few provisions in the document that explicitly bars particular kinds of state legislation, forbids states from enacting laws "impairing the Obligation of Contracts." Mortgage holders asserted that the moratorium statute violated the provision by retroactively altering their rights under mortgage arrangements voluntarily entered into by homeowners.

The statute was challenged when a Minneapolis couple sought relief under the law after their home was foreclosed upon because of large mortgage delinquencies. Their homestead was on the edge of downtown Minneapolis, between where the Basilica and Farmers' Market now stand. A Hennepin County district judge ruled in favor of the homeowners, extending the time in which they could buy back the property for up to two years. The case, Home Building & Loan Association vs. Blaisdell, was appealed to the Minnesota Supreme Court, which upheld the judge's dispensation.

The case reached the U.S. Supreme Court in 1934, when homeowners throughout the nation, including Minnesota, were still reeling, despite some glimmers of economic recovery. The high court at that time was no friend of intervention in the economic forces of the free marketplace, which led many observers to predict a resounding defeat for the Minnesota measure. But they were wrong. By a 5-4 vote, the justices in Washington upheld the moratorium law.

Writing for the majority, Chief Justice Charles Evans Hughes reasoned, as did the state Supreme Court, that the law was constitutionally valid and did not infringe the contract "impairment" clause. Without deciding whether the measure was "wise or unwise," he declared that it was permissible because it was "clearly so reasonable as to be within the Legislative competency."

The court's analysis had a bit of populist tone, noting that those objecting to the measure were "predominantly organizations, such as insurance companies, banks, and investment and mortgage companies" whose foreclosures jeopardized the "investment of homeowners." The court deemed the law to be a "rational compromise" that did not really impair the "integrity" of the mortgage industry because homeowners were required to maintain payments during the freeze and because the mortgagees could exercise their rights after the two-year period.

Four judges dissented, including Pierce Butler, Minnesota's first member of the high court. They saw the moratorium as precisely the type of measure that the "impairment" clause sought to bar in light of the preconstitutional practice of legislative bodies setting aside indebtedness incurred by the largely agrarian society of the time.

The narrow decision in the Blaisdell case set the stage for subsequent mortgage moratoriums, including measures passed by the Minnesota Legislature in the 1980s granting relief to farmers besieged by economic setbacks of that era.

The bottoming-out of the home market and the attendant foreclosures of today might call for similar relief. Forget about voluntary foreclosure freezes. Lawmakers should heed the edict of the Supreme Court in the Blaisdell case: "While emergency does not create power, emergency may furnish the occasion for the exercise of power."

With the astounding number of foreclosures -- nearly double the number a year ago -- maybe it's time for the Legislature, when it reconvenes in January, to take a page from constitutional law and historical lore and enact a new mortgage moratorium.

Marshall H. Tanick is a Minneapolis attorney.