Effects of bailout proposal on homeowners still unclear

The initial proposal focused on helping financial institutions with bad debt on their books, primarily mortgage related. The government would buy troubled assets in an effort to stabilize financial markets.

The effects on homeowners were much less clear in the initial proposal. And even with news trickling out that foreclosure prevention efforts could play a bigger role in the deal, specifics are lacking.

University of Minnesota law professor Prentiss Cox said he'll be eager to learn what details are included. Cox was a proponent of a measure, vetoed by Governor Tim Pawlenty, that would've allowed Minnesota homeowners to defer the foreclosure process. Cox has strong opinions about what provisions should make their way into the federal government's initiative.

"Most important one is that we get rights for homeowners in default and in foreclosure that aren't there now," Cox said. "And that is the right to modify these loans to fair and reasonable payments so they can survive as homeowners."

Cox said the bankruptcy process could provide an avenue for loan modifications. Currently, the process does not permit renegotiation of home loan terms. Cox and other housing advocates want that to change, but there's a lot of opposition to such measures from the banking industry.

Paul Schuster, president of the Minnesota Mortgage Association, said he's not sure what to make of the bankruptcy tool, but does favor measures to help maintain home ownership responsibly and possibly through a negotiated settlement between the homeowner and lender.

"I think that the foreclosure process itself is antiquated," Schuster said. "As I understand it, different from state to state. I think that there can be some improvement made in that process to open the lines of communication, look at the timelines, look at who's involved, and make it a better system for both the homeowner and the lender. I definitely think there's room for that."

Above all else, Schuster wants to see the government's bailout package create a healthier mortgage market.

"Ultimately, we would like it to spur more demand in the types of securities that in fact help drive the mortgage market," Schuster said. "Up until now, investors seem very wary of anything related to mortgages, even though some mortgage markets have been operating fairly regularly."

Those mortgage-backed securities, which are clusters of mortgage loans sold to investors, have been problematic, according to Minnesota Housing commissioner Tim Marx. He's hoping that the federal proposal will wipe away some of the confusion created by securities.

"The problem in getting assistance to homeowners has been that it's very hard to track down the owner of the securities, the owner of the mortgage in these complicated securitized mechanisms," Marx said. "We will know who the owner is, it's the federal government. "

But Marx said the federal government will have to hire private or public entities to administer the loans. He said financial institutions in Minnesota, or even the housing finance agency, might have to manage the securities on the behalf of the federal government, and possibly even negotiate with homeowners.

But, it's too early to tell how the proposal will shake out. The top Republican on the Senate Banking Committee said the proposal was "neither workable nor comprehensive."

Editor's note After this story was published University of Minnesota law professor Prentiss Cox contacted us regarding the accuracy of Commissioner Tim Marx's comments. Cox disputed the assertion that the bailout would help distressed homeowners identify the owner of their mortgages. Cox pointed out that the government would not become the owner of mortgages since, for the most part, it wouldn't be buying mortgages. The government would be buying complex financial instruments made up of components of mortgages bundled together, not the mortgages themselves. Marx agreed with Cox.

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