Originally published in the The Hennepin Lawyer. Republished with permission of the author.
It is really quite revolutionary, the idea that just by talking to each other, conflict can be resolved.
While it is true that the adversarial system of conflict resolution is designed to do several things quite well, there are many things that it cannot do well. An adjudicatory system can determine right from wrong, guilt from innocence, negligence from no negligence, and custodial from noncustodial parent in the case of custody battles, but where there are complex relationships that continue into the future, and where some major intervening event affects the relationship, sometimes just talking and negotiating works better to resolve the conflict than an adjudicatory system that applies uniform rules to all similar conflicts.
In the case of mortgage foreclosure, laws that allow the lender to collect the debt by foreclosing on the security pledged are a workable and predictable system of conflict resolution. However, when unforeseen and cataclysmic events occur that cannot be controlled or predicted by either side to the original contract, application of the usual legal remedies may prove unworkable. Lessons learned from family and divorce mediation have helped us see that while it is generally the case that marital termination agreements and parenting plans can be seen as contractual road maps that guide the post-divorce behavior and relationship of the parents, there are unforeseen circumstances that require parents to adjust the relationship and seek mediation to change parts of the contract. Likewise, in the case of the lender/homeowner relationship that may extend over a 30-year period, there may be occasions where it is necessary to change the terms of that contractual relationship. This was true in the case of farmers and bankers in 1985 and it is true of homeowners and their lenders today.
Gov. Rudy Perpich understood the inadequacy of the traditional mortgage foreclosure process in 1986, and the Minnesota Bankers Association, to its credit, also understood the need to go beyond the simple response of “If you don’t pay, we take your land.” At legislative hearings in 1986, bankers claimed that 65 percent of all farm land mortgages in Minnesota were in some state of delinquency. As with all falling land price situations, the more foreclosures there are, the more it drives down land values and the more it erodes the security interests, and so on and so on.
There was a severe crisis in 1986, and some were saying it was necessary to take action as was done during the Great Depression and pass mortgage foreclosure moratorium laws. When former Lt. Gov. A.M. “Sandy” Keith phoned my wife and me (mediation trainers) and said we had to get over to the Capitol for an afternoon meeting with the governor, we did not know what to expect. At the meeting, after Keith was done razzing Perpich for some trip he had taken to Romania (they were good friends), he introduced us to the governor, and the conversation turned to figuring out what to do with the farm mortgage delinquency problem. The bankers were adamant. They did not want a mortgage moratorium. Perpich declared that doing nothing was unacceptable. Then he turned to Keith and asked, “What do the Ericksons have that might be useful?”
We explained how we had recently been successful at mediating a restructuring of multiple loans in default for a farm family in Erskine, resulting in the family staying on their land and avoiding foreclosure. In what was to be the first farm mediation that occurred in Minnesota in 1985, the three lenders—consisting of the local banker, the Production Credit Association representative, and the Federal Farm Home Loan Administration banker—sat down with the farm family at the Crookston Library. We were able to mediate a comprehensive restructuring of the payment schedule, the interest terms, and the collateral for all of the agricultural land and the equipment debt. The farm had, like countless others in Minnesota, experienced low prices, bad weather, and burdensome debt load created in easier times that was about to crush the operation. In addition to the lenders all making some concessions in the terms, interest rates, and payment schedules, the farm family was also asked to bring a “gift” to the negotiating table in the form of a willingness to cash in a whole life policy as a measure of good faith and to show the federal bank regulators that there was some payment activity on the defaulted loans, until the next crop could be harvested and sold.
In mediation sessions over one and one-half days, we all learned a lot. We realized that everyone shared common interests. We also realized that the lenders had some room to make concessions, provided they could keep the bank regulators appeased and provided they believed they could see a way to recover more of their funds in mediation than through simply taking the land back. The bankers did not want to be in the real estate business and the farm family wanted to stay in the real estate business. The farm family wanted to pay back the loans. However, they could not do so under the terms of the original mortgages. The problem being examined was not whether the performance of the farmer justified taking his land, the problem was to determine if the farm operation was viable in the future, and, if so, could it be revived; if not, could it be terminated in a way that resulted in both sides coming out better? With the Erskine farm, there was not much equity to work with and one of the bankers wondered if it wouldn’t be better to work out a voluntary liquidation of the operation. After much work, in the end, everyone decided to give modification and restructuring a try and trust the farm plan numbers that indicated in a good year with reasonable prices and reasonable weather, it would be possible to cash-flow the payments, provided both the husband and the wife found part-time jobs in town to supplement their incomes, which they were more than willing to do. The lenders made a voluntary decision that such action was a wiser financial decision than foreclosure.
Perpich listened and calmly said, “We have to act.” He asked us to begin training volunteer members of the community to mediate these cases. He asked the bankers to pay for the training and to help fund the mediation program. We decided that all parties would have to pay some fees toward the costs of the mediators as well. We embarked on training over 700 farmers, teachers, CPAs and others who were willing to learn a structured process of what we called client-centered mediation.
The result was the Famer-Lender Mediation Act that required 90 days of mediation before any delinquent farm land of more than five acres could have foreclosure proceedings commenced. Our mediation process did not take a “save the farm” approach, but rather required the mediator to be neutral in managing the discussions and be respectful of the self-determination of the parties in the room. It also required the mediator to understand all of the newly emerging settlement options, as well as requiring all farm families to complete an extensive questionnaire or bring their farm plan figures to the mediation that showed whether the farm operation was viable. Upon taking an inventory of all assets and debts and listing the status of the loans, it was possible to see if the numbers allowed for a restructuring or, in the alternative, a cooperative liquidation. In either choice, the cooperation of the parties usually ensured that they would do better at the mediation table than in the normal foreclosure process. Mediation allowed for more varied and what Roger Fisher and Bill Ury in their book, Getting to Yes, call “elegant solutions.”
When the housing bubble burst in 2008, my partner Marilyn McKnight and I wrote an op ed article for the Minneapolis Star Tribune, calling for adoption of a similar approach to that used in the 1986 Farmer-Lender Mediation Act. Except that with more mediators now, we suggested using professional mediators whose fee would be shared either equally or proportionally by the homeowner and the lender. In that article, we listed the most common settlement options that emerged from our experiences in farmer-lender mediation. These elegant solutions that grew out of necessity in the discussions at the farm mediation table are applicable to the housing mortgage foreclosure problem today. They are based upon the observation that all mortgage foreclosures, whether by advertisement or by action, cost on average of $5,000 to $15,000 in legal fees alone, result in a vacant home with no immediate rent or mortgage payments after the period to redeem has expired, and in most states, depending on the strength of the debtor protection laws, result in the owner being able to stay on the property for 6-9 months before actually being evicted. For example, in 1986, the farmer was able to, in some cases, stay for free on the land for 22 months and get two crops off the land before being forced to vacate.
These options include:
Deed Back Lease Back
In the case of farm families whose loans could not be restructured, the option of voluntarily deeding the property over without the need for a foreclosure action allowed the farmer to stay on the land and continue farming through a negotiated lease. The bankers could then close their books on the problem loans. They would also have a steady stream of income from the farm family as renters of the land they formerly owned who would farm the land and take care of the property. There were also cases where the parties negotiated a first option, as a part of the lease terms, for the farmer to buy back all or part of the land if economic conditions improved.
Today, with houses being foreclosed on and communities becoming wastelands of boarded-up unoccupied property, it might make more sense for the banks to take a deed back and rent to the former owner with rental terms that would work for both the former owner and the bank. For banks who will not get their expected loan payment on the mortgage, it seems sensible that some money is still better than no money.
Straight Deed in Lieu of Foreclosure
This option is a form of the above, but with no ongoing rental option to the former owner given. The negotiations center around giving the banks something in exchange for not seeking a deficiency judgment against the former owner and the former owner possibly emerging in a better position to seek credit in the future. In today’s environment, where high legal fees and the costs of hiring a company to clean up the property after it has been left vacant or trashed, it seems more sensible for banks to get the house back voluntarily intact and the former owner to exit without a foreclosure on his or her record.
This option calls for the lender to delay collection. In farm mediations, it meant waiting until the crop was harvested. In home foreclosure mediations, it might mean waiting until a person is rehired, with an agreement that after a certain amount of time elapses, a deed in lieu of foreclosure would be given.
Modification and Restructuring of Loan Terms
We could take a lesson from our European cousins where it is common practice to have 40-, 50- or even 90-year mortgage terms. With all of the money that banks are losing, would they not be better off reducing the payments to a more manageable amount by extending the payback period for a family that has lost earnings due to layoff of one spouse? There are many forms this can take, all designed to meet the payment abilities of the stressed borrower.
Voluntary and Cooperative Liquidation (Short Sales)
In farm mediations, it was always better to cooperatively plan the foreclosure auction and give the farmer time to sell off the property or the equipment. Likewise today, borrowers and lenders are cooperating to achieve short sales. This cooperation makes sense as it is always easier to sell at a good price a home that has the stressed borrower participating in the sale and providing a clean property than if the bank is trying to sell a property that has been boarded up with plywood for six months.
Notice that so far, nothing has been said about the lender giving anything away. It was always the goal of the farmer lender mediation process to get the lender its entire debt, but maybe in a different way and over a longer period of time. Nowhere should it be assumed that a mediation process is designed to force the lender to cave in. However, another option that was used sparingly was loan forgiveness.
Forgiveness of Loans
In certain cases, when the security for the original loan has been so compromised, it may be appropriate to write down the loan and start with a new mortgage that is thus more affordable to the homeowner. But in order to induce the lender to accept some significant losses (that are going to be created for the lender in any event if the normal foreclosure process is followed), why not use the creativity of the mediation table to give the lender a shared equity position in the property and provide for additional funds to the lender should the property be sold in the future above a certain price? This shared equity was not pursued in the farm mediation context, but it is certainly in keeping with the mutuality of the mediation process that says parties are “in the soup together.” It was kicked around as an option on a few cases in 1986 and 1987, but the lenders could not figure out a way to accomplish such a deal in light of rigid banking regulations that seem to prevent consideration of the option.
Cooperation between First-Position and Second-Position Lenders
Although it was not commonplace, in the 75 farm mediations that I conducted during that period, there were a few settlements that called for the loans to be restructured such that the first- and second- mortgage holders actually shared some of the loss. Normally, when there is not enough equity for the second mortgage holder to recover his funds, he is out in the cold holding an empty paper sack. But there were actually a few circumstances where a proportional sharing of the loss between the first and second mortgage holders was negotiated in order to get the deal done. If we as taxpayers are spending billions to bail out our bankers, is it too much to ask of them to think about sharing the hit with other lenders and each share equally or proportionally in the burden of helping the stressed occupant eventually pay back the loan, especially when the lack of such cooperation prevents a settlement due to one obstinate lender?
It is really quite revolutionary, the idea that just by talking to each other, conflict can be resolved. None of the above solutions would be available to the court in a foreclosure action. All of the above solutions, and many more depending on the creativity of the parties at the mediation table, are available to parties who are talking to each other.
House File 0354 is a mortgage mediation bill sponsored by Rep. Debra Hilstrom and others that would get lenders and homeowners talking through a mandatory mediation process. A previous form of the mortgage mediation bill was vetoed by the governor last year. The current bill, as was the case last year, is supported by the Attorney General’s Office.
I hope to see another editorial containing almost the exact words of the St. Paul Pioneer Press for Jan. 6, 1988:
Such dedication to finding common-sense solutions to difficult problems paid off handsomely. Thousands of Minnesota farm families [substitute here homeowners] found a way to remain on the land — and without the creation of yet another government bureaucracy.
1 See Minneapolis Star Tribune article titled “Mediation used to help farmers and their creditors reach accord,” Dec. 22, 1985. (This report describes in detail interviews with the farm family and the mediators who conducted the Erskine case.)
2 There were 511 mediators who had settled more than 5,000 disputes in the first nine months of the program. St. Paul Pioneer Press Dispatch article titled: “Farm loan mediators: They earned laurels in cooperative effort,” Jan. 6, 1988.
3 Roger Fisher and William Ury. Getting to Yes: Negotiating Agreement without Giving In. (1981).
4 Minneapolis Star Tribune article titled “The problem? Foreclosures. The solution? Mediation,” Jan. 28, 2008.
5 “Farm loan mediators,” supra, note 2.