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Editorial: Foreclosure remedies shouldn't go too far

Some proposed foreclosure remedies wise, others overreach.

Last update: March 9, 2008 - 4:04 PM

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HELPING HOMEOWNERS

"A number of [state] proposals give homeowners new tools to prevent foreclosures. The deferment option...offers breathing room for homeowners, alternatives to lenders who don't want to be in the real estate business and stability to neighborhoods devastated by an avalanche of foreclosures''

Sen. Ellen Anderson, DFL-St. Paul.

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Subprime loans, predatory lending, overzealous borrowing and rising unemployment have pushed property foreclosures to all-time highs. Last year, more than 50,000 Minnesotans were delinquent on payments, including about 20,500 who lost their homes. Unless the tide turns, another 30,000 more are expected to be in foreclosure and lose more than $1.5 billion in home value in the next few years.

The damage isn't limited to those who must abandon their homes. Foreclosure-related problems have rippled throughout the economy, affecting neighborhoods, tax bases and stock portfolios. Certainly government can play an important but limited role in getting the nation out of this mess.

But in the rush address the crisis, federal and local lawmakers should be careful not to do more harm than good.

More than a dozen plans are pending at the Legislature to help to help owners and renters stay put. The best of them would give more options to renters when landlords are behind on payments, require lenders to match homeowners with counseling, and make it easier to declare vacant property abandoned to speed up sales.

Legislators also suggest deferring some foreclosures for one year to allow Congress to develop a longer-term solution. Under the Subprime Foreclosure Deferment Act, qualified owners with subprime loans who are in mortgage trouble would have foreclosure deferred if they paid at least 65 percent of the payment due when the default occurred, or the minimum monthly payment when the mortgage was created. The bill's authors say that limited, targeted approach could help 15,000 Minnesotan families keep roofs over their heads.

Understandably, some lenders are wary of the bill, warning that forcing lenders to take partial payments could lead to tighter credit for responsible borrowers. That's a legitimate concern, and one lawmakers should weigh carefully. They also should ensure that any type of limited and temporary deferment plan covers only borrowers who were victims of shady lenders, not consumers who reached for the dream house they couldn't afford.

In Washington, Senate Democrats introduced the Foreclosure Prevention Act of 2008, which would increase funds for housing counseling and amend the Truth in Lending act to make mortgage documents easier to understand.

But some legislators are also recommending changing bankruptcy rules to let the courts adjust mortgages. Plans like that, as well as those that would require lenders to permanently rewrite loans across the board, could have unintended negative consequences. If government forces lenders to reduce principal or freeze or adjust interest rates, it could lead to higher rates and fewer credit options for future borrowers.

Foreclosures are devastating and costly -- both to property owners and lenders. That's why government should do all it can to encourage voluntary loan adjustments. Especially in this depressed housing market, lenders should be highly motivated to keep people in their homes even if it means renegotiating loan terms.

Citizens expect and deserve government help when the national economy is threatened. On that front, both local and federal lawmakers are making some wise moves to put the mortgage market back on track. Yet they should also beware of forcing market adjustments that could make matters worse.

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