Column: Fixing the housing crunch

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ST. PAUL — For many Minnesotans, today’s national housing crisis brings back painful memories of the 1982-1987 farm financial crisis. Rural Minnesota never fully recovered from that era as nearly 20,000 Minnesota families lost their farms, small town businesses locked their doors and boarded their windows, and many rural banks stopped writing farm loans.

Recalling the 1980s can be useful. It points to a solution to the housing, or mortgage crisis, that has toppled the U.S. economy and thrown the entire world into recession. What’s more, a corrective shock to the economic system can start here in Minnesota and it would quickly spread across the nation.

That shock could come from a modest state program that would guarantee the down payment, and thus the current market value, of homes currently on the real estate market in a few selected counties. If, after five years, home values drifted still lower, people buying homes now could turn their homes over to a state housing agency for disposal and recover their down payment.

Minnesota 2020 has proposed a Minnesota Home Values Pilot Program that would use state bonding authority five years from now to back up the home equity guarantee. Such a plan based on $25 million in bonding authority would guarantee from 4,500 to 5,500 new home mortgages in the pilot counties. That should be sufficient to get the housing market moving again, and it would stimulate the market statewide. Seeing the need to stop the housing free fall around the state, the Minnesota Senate and House both recently introduced legislation to implement such a home values program.

This would duplicate what the Farm Credit Bank of St. Paul did in 1987 to guarantee farmland values for the next five years. Larry Buegler, a veteran banker with the Norwest Bank system, was brought in to the farm credit bank when it was effectively insolvent. It had 1 million acres of Minnesota, North Dakota, Wisconsin and Michigan land on its books from foreclosures and abandonment, and had another million acres on the way.

Buegler recalls that there were heroic efforts to restructure farm mortgages and debts by banks, mediators and nonprofit groups. But nothing stopped the collapse in land values that kept piling on troubled mortgages, putting more farms “under water” in which debts exceeded the farm value, and kept potential buyers out of the market waiting for prices to reach bottom.

In an unprecedented banking move, the St. Paul bank offered a Land Values Guarantee program assuring buyers they could recover their investment equity in five years if land values continued to fall. Not one cent was ever returned, Buegler said. And the bank sold more than 800,000 acres of land within the first year as land prices began to recover.

This didn’t help the unfortunate people who had already lost their farms, Buegler said. But it helped save most of the 22,000 farmers who were then in trouble by setting a floor under land values. That allowed lenders and borrowers to restructure debt.

Today, the housing market, borrowers and lenders need the same platform to work out financial problems.

Matt Entenza, founder and board chair of Minnesota 2020, said the current housing crisis is similar to the 1980s farmland market. “There were people back then who were standing on the sidelines, not wanting to look like vultures when their neighbors were losing their farms,” the Worthington native said. “Now, we have people standing on the sidelines, waiting for signs that the housing market has bottomed out.”

“Lenders need to know there is a bottom, or floor, under the market as well,” Entenza said. “We can set the floor.”

There is a tendency to look at today’s problem as being primarily a “big city” problem. That is no longer true. While agriculture is now one of the strongest sectors in the Minnesota economy, the weak national economy spills out from cities causing job losses and mortgage problems throughout the state.

In southwest Minnesota, Nobles County around Worthington had no foreclosures in 2005 and 2006. But the nonprofit HousingLink organization found Nobles had 18 foreclosures in 2007 and 24 last year. Murray County has had foreclosures increase from 10 in 2005 to 16 in 2008, and small population Rock County has watched foreclosures increase from 3 in 2005 to 15 in 2007 and 13 last year.

The top down approach of throwing trillions of dollars at the banking industry isn’t stopping the foreclosures. A ground up program, with minimal risk to taxpayers, is a better approach.

Former journalist Lee Egerstrom is an economic development fellow with Minnesota 2020, a progressive, nonpartisan think-tank based in St. Paul.

Tags: opinion, columns, minnesota2020, housing