State view: Farm crisis of the ’80s offers clue to solving housing crisisForeclosures have skyrocketed in Duluth, on the Iron Range and across Northeastern Minnesota. In St. Louis County, foreclosures jumped from 219 in 2005 to 476 last year, according to HousingLink, a nonprofit. In Carlton County, they tripled from 41 in 2005 to 124 last year, reflecting the forest industries’ national economic woes.
By: Lee Egerstrom, Duluth News Tribune
Foreclosures have skyrocketed in Duluth, on the Iron Range and across Northeastern Minnesota. In St. Louis County, foreclosures jumped from 219 in 2005 to 476 last year, according to HousingLink, a nonprofit. In Carlton County, they tripled from 41 in 2005 to 124 last year, reflecting the forest industries’ national economic woes.
The numbers reflect people, families and loss.
And for many Minnesotans, the current crisis sparks painful memories of the state’s farm crisis from 1982 to 1987. Rural Minnesota never fully recovered. Nearly 20,000 families lost their farms. Small-town businesses locked their doors. And rural banks stopped writing farm loans.
But recalling the 1980s can be useful. It can point to a solution to today’s housing crisis, which has contributed to the toppling of the U.S. economy and which has thrown the entire world into recession. Even more useful in recalling the painful past is realizing that a corrective shock to the economic system can start in Minnesota and can spread quickly 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. If, after five years, home values drifted still lower, people buying homes 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 this home-equity guarantee. Such a plan, based on $25 million in bonding authority, would guarantee from 4,500 to 5,500 new mortgages in pilot counties. That should be sufficient to get the housing market moving again, stimulating the market statewide.
Seeing the need to stop the housing freefall, the Minnesota Senate and House both recently introduced legislation to implement such a program. It would duplicate what the Farm Credit Bank of St. Paul did in 1987 to guarantee farmland values. Larry Buegler, a veteran banker, was brought in when Farm Credit Bank was effectively insolvent, when it had 1 million acres of Minnesota, North Dakota, Wisconsin and Michigan land on its books from foreclosures and abandonment, and when it had another 1 million acres on the way.
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 plummet. Not one cent was ever returned. And the bank sold more than 800,000 acres within the first year. Land prices began to recover.
This didn’t help the unfortunate people who had already lost their farms, Buegler reported. But it helped save most of the 22,000 farmers who were in trouble by setting a floor under land values. That allowed lenders and borrowers to restructure debt.
In today’s housing market, borrowers and lenders need the same platform to work out financial problems.
“Lenders need to know there is a bottom under the market,” said Matt Entenza, Minnesota 2020 founder and board chairman. “We can set the floor.”
There is a tendency to look at today’s foreclosure problem as a big-city problem. But that’s no longer true. While agriculture is now one of the strongest sectors of the Minnesota economy, the weak national economy spills out from cities, causing job losses and mortgage problems everywhere.
The top-down approach of throwing trillions of dollars at the banking industry isn’t stopping foreclosures. A ground-up program, with minimal risk to taxpayers, would be much better.
LEE EGERSTROM is an economic development fellow with Minnesota 2020, a progressive, nonpartisan think-tank based in St. Paul. A former journalist, he and Larry Buegler co-authored a report, “Stopping the Freefall: Stabilizing Minnesota’s Housing Market,” which is available at mn2020.org.