Marilyn McKnight and Stephen Erickson: The problem? Foreclosures. The solution? Mediation.

It worked in the 1980s for farms. It can work again for the current mortgage crisis.

By MARILYN MCKNIGHT and STEPHEN ERICKSON

Last update: January 28, 2008 - 5:41 PM

There is a private-sector solution to rising mortgage delinquencies that already has proven its success -- in 1985. It can work today.

Back then, we were summoned to Gov. Rudy Perpich's office in the face of massive farm foreclosures across the state. Nearly two of every three farm-related mortgages were in some state of delinquency. How did this happen? Land values skyrocketed. Banks were giving away money like it was water and were relaxing credit discipline. Then prices fell. The bubble burst. Sound familiar?

What solution did Gov. Perpich advocate? A government bailout? No. Fire sales? No. Banks going under? No. Our work ultimately led to legislation promoting use of a mediated agreement to save family farms. That same action could save family homes today.

Back in the mid-1980s, the Legislature passed a simple law. For farms of more than 5 acres (ruling out hobby farms) with a loan in arrears, the farmer and the bank had to engage in 90 days of mediation before commencing foreclosure proceedings. Meanwhile, the loan would be kept from entering a nonperforming pool. Minnesota was the first state to do this. Others followed.

Here is why we ought to try this approach now, and why it would be good for banks and good for homeowners. First, let's consider what happens when a bank forecloses on a property. It probably costs the bank $5,000 to $7,000 in legal fees. Meanwhile, redemption laws allow the homeowner to continue to live in the property without paying the mortgage for at least six months and in some cases longer. So the bank is out, say, $1,200 a month in mortgage payments for a year. Total cost with legal fees: about $12,000 to $15,000.

Now the property is vacant. The pipes freeze. There could be vandalism. More cost to the bank, not to mention the impact on neighbors. Then the bank sells the property, if it can, at a loss, because of all the other foreclosed houses in the neighborhood. In a bad market, the bank could be eating $40,000 to $100,000 on the deal. The result is terrible for the bank, and worse for the homeowner, who with children in tow is left out on the street and in the cold. How does this strengthen society?

Enter a mediated settlement. Here are just a few options when banks and homeowners sit down and talk:

•Lowered payments and extended payment terms to give borrowers time to get back on their feet.

•A temporary decrease in the interest rate.

•Deed-back leases, in which the bank takes ownership and the family pays a rent it can afford. If the economy improves, the family can repurchase the property.

•Helping the homeowner sell the property and forgiving the loss between the sale price and the outstanding mortgage in exchange for cooperating on a voluntary liquidation.

•An agreement that calls for the homeowners who default on a negotiated solution to leave the property immediately so the bank can resell it without the delay of foreclosure.

Any of these solutions could cut the bank's potential loss considerably -- and they would leave the homeowner with some dignity and options.

The beauty of mediation is that it allows the burden of the mistakes to rest on the shoulders of the banker and the homeowner who got into this problem together and now will get out of it together.

A mediated settlement usually takes a day of work or less. Cost to the bank: $1,000 to $2,000. (Mediated agreements would then need to be drafted into legal agreements by a lawyer.) The result: Bankers get payments -- perhaps delayed, and perhaps less than what is owed -- while homeowners weather the crisis, have roofs over their heads and keep their children in their same school. Everybody wins.

Marilyn McKnight and Stephen Erickson are principals of Erickson Mediation Institute in Bloomington. McKnight is president of the national Association of Conflict Resolution, based in Washington, D.C.

Recent Commentary stories

Garrison Keillor: Let's leave Afghanistan before it's last call - January 28, 2008

Garrison Keillor: Let's leave Afghanistan before it's last call - We don't like quitting, but we also don't like overstaying our welcome. More

Comment on this story | Be the first to comment | Hide reader comments

New ideas for the public sector

THERE'S NEVER BEEN A BETTER TIME to create a more efficient Minnesota. Facing large budget deficits at the state, county and local levels, Minnesotans are seeing with new clarity that the public sector must adapt to new economic realities. Only the smartest, most strategic reinvention will ensure that our tax dollars are spent on the best programs and services. Read more

About Opinion Exchange

Opinion Exchange is produced by the Editorial Department, which is dedicated to hosting the discussion on a range of issues of interest to Star Tribune readers online and in print. In its new format, it's our hope that Opinion Exhange will create a more dynamic dialogue between Star Tribune readers and the Editorial Board. Many individual posts will be written and signed by members of the Editorial Board and will reflect their own opinions. Daily editorials will continue to represent the institutional voice of the newspaper and be researched and written by the Editorial Department, which is independent of the newsroom.

Subscribe to RSS|Learn more about RSS