Senate passes bill to defer foreclosures, but Pawlenty and bankers oppose it

A new plan to slow home foreclosures won Senate approval Monday, but its chances of moving forward face challenges from the banking industry and opposition from Gov. Tim Pawlenty.

Although the DFL-controlled Senate approved the plan by a 34-29 vote, several key DFL members -- including Senate President James Metzen -- voted against it, and an industry lobbyist said the plan "goes in the wrong direction."

The chief House sponsor, Rep. Jim Davnie, DFL-Minneapolis, said that he was disappointed in the lack of bipartisan support, but added that the House would consider the plan later this week.

Supporters said the bill would target about 12,000 homeowners in Minnesota and establish a process allowing homeowners who hold a subprime or negative amortization mortgage to defer a pending foreclosure for up to a year. Under the proposal, home- owners would have to contact a foreclosure-prevention counselor, agree to use their services and make partial monthly payments during the deferment period.

Lenders could cancel a deferment if they participated in good-faith negotiations and provided a written agreement that allowed a homeowner to make monthly payments based "on their reasonable ability to pay." If homeowners felt a deferment was canceled by a lender who did not negotiate in good faith, they could ask for a mediator to examine the case and issue a binding ruling.

Supporters said the proposal was aimed at large, out-of-state investment companies. Loans originated by federal or state-chartered banks, savings banks or credit unions would not be eligible for deferments, under the plan.

"This, honestly, is not a bailout," Sen. Ellen Anderson, DFL-St. Paul, the chief Senate sponsor, said at a morning briefing. She said the proposal is focused on homeowners who are within reach of making their payments and is meant to serve as a bridge until federal officials act to help solve the crisis. Not all those facing foreclosure would be helped by the plan, she said.

"Give the idea a shot," said Sen. Linda Scheid, DFL-Brooklyn Park. "People were duped" into agreeing to many subprime loans, she said. "We have a situation that is extraordinary," she said. "These predatory loans have disrupted our neighborhoods."

Is it constitutional?

Opponents, however, said the plan is likely unconstitutional because it allows the Legislature to interfere with contracts between homeowners and lenders. Others said the proposal would merely postpone foreclosures that were already likely. "The structure of this will only take a person that is in trouble and delay the inevitable," said Sen. David Hann, R-Eden Prairie.

"I'm not sure how this helps," he said.

Other legislators said that the state had taken repeated steps to ease the foreclosure problems. Sen. Rod Skoe, DFL-Clearbrook, said the latest proposal overreached. "It appears to me it's much too wide and much too broad," he said.

Pawlenty spokesman Brian McClung said after the Senate vote that the proposal "would do more harm than good. It would negatively impact the credit market for the approximately 98 percent of homeowners not in foreclosure."

Davnie said the Senate vote, which included widespread Republican opposition, was disappointing. "In a year where we've got record foreclosures," he said, "... I don't know how to understand that."

Mike Kaszuba • 612-673-4388