But that approach, which Miller has called a “precedent for success,” involves a controversial element that banks so far have dismissed as both unequitable and unworkable: forgiving part of the loan balance, or principal, for borrowers who are struggling to make payments.
“Principal reduction is a tool in the toolbox that’s been underused,” Miller said in a recent interview. “We had principal reduction in Iowa during the farm crisis and it worked very well. By reducing the principal, the farmer then — the homeowner today — can make the payment . . . [and the] payment is greater than what the investor would make on foreclosure. That’s a win for everybody.”
Miller had been in office for years when the farm crisis peaked in the mid-1980s. Thousands of farmers had become overleveraged in the preceding years, taking advantage of booming property values and low interest rates to take out more loans and buy more land and equipment.
When double-digit interest rates arrived and the value of the farmers’ land and crops began to tumble, many found themselves unable to pay their bills. A wave of foreclosures swept across the state and devastated many communities.
“Things began to spiral downward,” said Alan Tubbs, a veteran Iowa community banker who headed the agricultural division of the American Bankers Association. He worked with the Agriculture Department on programs to help mitigate the crisis. “It was an emotional time as well as a difficult economic time.”
As part of widespread efforts to ease the upheaval, Miller teamed with the Iowa Bankers Association and other groups to encourage the state legislature to pass a law requiring mediation between borrowers and lenders before foreclosure.
The goal, Miller said, was to find “the sweet spot,” in which the farmer could remain on his land and the bank received more in payments than it would from foreclosure, even if writing off a portion of the loan was necessary.
“Some of the banks weren’t too thrilled with having to do that at the beginning,” Neil Milner, then head of the Iowa Bankers Association, said of the mediations. But in time, he said, “everybody gave a little. The farmer could walk away with something to get started again; the institution got the issue resolved.”
Mike Thompson headed up the Iowa farm mediation program beginning in 1985, an effort that has handled more than 35,000 cases. Since 2007, he has run the state’s mortgage foreclosure hotline, which he said was inspired by the farm crisis.