Republicans at the state and federal level have not exactly been sympathetic to the plight of millions of homeowners who are struggling to pay off mortgages on houses that may have lost 30 percent or more of their value. In general, They take the stern approach: If you borrowed the money, repay the money. If you can’t repay the money, too bad. Hit the street.
However, it’s downright amazing how quickly that tune can change when it’s rich people who might need help.
Consider Senate Bill 448, which passed the Georgia Senate earlier this year and is now making its way through the House. In the version passed by the Senate, it would give large real-estate developers a way to retroactively dump much of the debt that they have personally promised to repay to banks in the state. It’s a pretty astonishing little piece of legislation.
(The bill was introduced by Sen. Don Balfour, a Gwinnett Republican and the chairman of the powerful Senate Rules Committee. It’s certainly not hard to think of politically influential Gwinnett developers in a financial position to benefit a great deal from such a bailout.)
Here’s the situation: During the real-estate boom, large developers who were seeking loans for their companies often signed agreements in which they personally guaranteed repayment of the loan should the company default. Those companies have now defaulted or gone bankrupt, so banks are naturally turning to the developers for the money they are owed.
Of course, the banks themselves are having trouble as well — Georgia leads the nation in failed banks. So banks that have bad loans on their books will often sell those loans at a reduced price to a third-party collection agency. A million-dollar bad loan might get sold for $600,000, for example.
The bank gets the loan off its books and at least collects that $600,000, writing off $400,000 in losses. The risk is shifted to the new holder of the loan, who then attempts to collect as much as it can on the original $1 million debt from the borrower.
SB 448 — again, in its Senate version — would change all that. Suddenly, the third party that acquires the loan for $600,000 would be allowed to collect no more than $600,000, plus interest, from those who guaranteed it. If you happen to be that guarantor — congratulations! — the Georgia Legislature has just magically reduced your debt by $400,000 and maybe even more.
The problem, of course, is that suddenly the collection agency has little or no incentive to buy the risky loan, because the potential profit from collecting on the debt has vanished. That in turn means the bank can’t get the $600,000 it might need to keep its balance sheets healthy. And if the bank fails, taxpayers will be on the hook through the Federal Deposit Insurance Corporation.
The state banking community has rallied to fight the bill, pointing out that the state Legislature cannot and should not retroactively rewrite loan contracts. They also warn that if bankers lose the ability to seek full repayment from guarantors, it’s going to make it much harder to make such loans in the future, hurting the state’s economic recovery.
“If the Legislature can retroactively annul a guarantor’s promise to pay, then banks cannot make loans based on a borrower’s signature,” BankSouth CEO Harold Reynolds points out. “That is one of the surest means to restrict needed capital for small business. Certainly, you know of many businesses started in a garage with a signature loan from a community bank. What will the Legislature propose next to retroactively alter contractual arrangements to the determent of citizens and businesses of Georgia?”
As the AJC’s Scott Trubey reports, changes in the bill were made this week to “further narrow its scope, so it would not apply to student loans, credit cards or car loans that are sold on the secondary market.” In other words, the bill was tweaked to remove any chance that it might accidentally help the “little people,” rather than those it was designed to benefit. Further changes have also been made, although the latest amended version of the bill has not yet been posted on-line.
All in all, SB 448 is a pretty sordid case study in how things work in the Georgia Legislature.
– Jay Bookman