A huge obstacle to resolving the U.S. credit crisis appears to be the securitization of loans, which results in a “slicing and dicing” of loans, with one party servicing a particular loan (and servicing rights bought and sold for any particular loan multiple times) and other parties as investors in the loan. With so many players, the transaction costs of renegotiating loan terms is very high and sometimes seems nearly impossible.
Nevertheless, the Minnesota legislature is now looking at mandating “loan mods,” or loan modifications. The Star Tribune offers an overview of the bill now in committee in the Minnesota Senate.
Some Minnesota legislation targeting loan origination practices passed in 2007-08 seems to have been “a day late and a dollar short,” addressing problematic lending practices only after the collapse in the market (i.e., market forces) had largely eliminated the practices. We’ll see when or if this statute is ever passed into law and, if so, if it is in time to have a positive effect.