Today is the first day of the legislative session in Minnesota. Governor Dayton has billed in as the “un-Session” in an effort to encourage the House and Senate to delete obsolete laws from the books. However, there is one proposed bill that I hope is passed into law and gets added to those books. That bill is currently titled House File 1941 and may be found here. Essentially, it requires mortgage lenders to engage in third-party mediation with homeowners prior to foreclosing on that individual’s home.
In order to appreciate the necessity of this bill, let’s step back and take a look at how foreclosure works in the state of Minnesota. Minnesota is a state that allows lenders to foreclose by advertisement. What this broadly means is that once a homeowner goes into default, the lender is allowed to sell the house at a sheriff’s auction after serving notice on the homeowner and advertising the sale in a legal newspaper (which no one reads) in the county where the sale is taking place. This procedure is in contrast to foreclosure by action in which the lender goes to court seeking a money judgment as well as an order from the court allowing them to sell the house through the sheriff.
Minnesota actually allows lenders to elect either of these remedies. In a foreclosure by action, a lender is allowed to obtain a deficiency judgment against the homeowner; in other words, they may pursue the homeowner for the amount of the loan remaining after the home is sold at auction. In a foreclosure by advertisement, that deficiency amount is forgiven, with the lender only retaining possession of the house. Nonetheless, because of its relative ease and efficiency, the vast majority of lenders elect to foreclose by advertisement.
So why is a bill requiring lenders to mediate with homeowners prior to foreclosure necessary? If you look carefully at the procedures in a foreclosure by advertisement, at no point is the lender required to engage in any sort of negotiation (or even conversation) with the homeowner. The banks essentially send the consumer notice of default and then sell the house after jumping through the necessary hoops. Conversely, foreclosure by action requires the parties to go to court where they will actually sit across from one another and…talk. A radical concept, I know, but a concept that will often result in some sort of compromise or loan modification being reached before the home goes to auction.
Now, I fully realize that banks will approve modifications or short-sales prior to conducting a foreclosure by advertisement. But just as often they will not. And it’s not as though the banks are simply acting in their best self-interest; some of these entities are just so big that it is often impossible for the homeowner to be put in touch with the right person to get whatever they need approved (just ask anyone who has tried to arrange a short-sale.) What this bill requires is that the individual who does have decision making authority with respect to a homeowner’s loan to actually meet with the homeowner in person in order to work something out prior to the home going into foreclosure. In the long run, I think passing this bill into law would be beneficial to both parties, and in any event, it is the least we can require before kicking Minnesotans out of their homes.