January 20, 2011
The Full Story of the Ibanez Case
Following up on a post I made last week, I wanted to share an item that might be useful to those of us trying to teach on (and/or sort out ourselves) the ongoing mortgage mess. Tracy Alloway of Financial Times has put up a blog post illustrating (literally) the tangled web of mortgage securitization missteps that led to the Massachusetts Supreme Judicial Court's recent ruling in U.S. Bank v. Ibanez.
January 19, 2011
Levinson and Junge on Property Tax on Privatized Roads
Last week we posted a link to the new article by David Matthew Levinson (Minnesota) and Bhanu Yerra (Minnesota), How Land Use Shapes the Evolution of Road Networks. Here's another road article from Levinson and Jason Junge (Minnesota): Property Tax on Privatized Roads. The abstract:
Roads cover a significant fraction of the land area in many municipalities. The public provision of roads means this land is exempt from the local property tax. Transferring roads from public to private ownership would not only remove maintenance costs from city budgets, but increase potential property tax revenue as well. This paper calculates the value of the land occupied by roads in sample cities and determines the potential revenue increase if they were subject to property tax. Further calculation computes the extent to which the property tax rate could be reduced if the land value of roads were added to the tax base. Property tax on privatized roads could generate meaningful revenue, but a corresponding reduction in rate for existing property would be small.
January 15, 2011
Validity of Foreclosure Titles after Ibanez
This past week the Supreme Judicial Court of Massachusetts issued a slip opinion in the case of U.S. Bancorp v. Ibanez unanimously affirming a Land Court decision invalidating a nonjudicial power-of-sale foreclosure because the foreclosing party had not produced a valid chain of title with regard to the mortgage. The SJC rejected the bank's arguments that a mortgage automatically passes to the assignee of the note and that an assignment in blank is a valid transfer of a mortgage. The SJC acknowledged that an executed Pooling Service Agreement (PSA) that properly identified the subject property could authorize foreclosure but found that the bank lacked the necessary paperwork in this case. Adam Levitin (Georgetown) analyzes the decision in a post at the Credit Slips blog.
Even though the majority of states allow assignment of the note alone to provide authority to foreclose, this decision has significant ramifications for the validity of many foreclosure titles in Massachusetts and the states that may follow the SJC's reasoning. The slapdash volume-maximizing paperwork practices of the mortgage securitization industry are hardly limited to robo-signing of foreclosure affidavits. Pre-default shortcuts such as improperly executed PSAs, missing collateral schedules, and incomplete transfers appear to be all too common.
What seems to be missing from the conversation so far is any discussion of how the nonjudicial nature of these foreclosures perpetuates the mess. In the context of botched mortgage securitizations, properties transferred by nonjudicial power of sale processes enjoy little of the title assurance that properly noticed judicial proceedings confer. Without the built-in action to quiet title provided by a judicial foreclosure, will those trying to prevent abandonment of foreclosed homes in the many power-of-sale states have to turn to title-clearing litigation just to make these properties bankable for rehabilitation and resale? Will our inner-ring suburbs be peppered with chronically derelict houses because our mortgage foreclosure proceedings are now producing titles as unreliable as those that tax foreclosure actions have produced for inner-city vacants in years past?
December 07, 2010
Mitchell, Malpezzi, & Green on Forced Sale Risk: Class, Race, and the "Double Discount"
Thomas W. Mitchell (Wisconsin, Law), Stephen Malpezzi (Wisconsin, Real Estate & Urban Economics), and Richard Green (USC, Lusk Center for Real Estate) have posted Forced Sale Risk: Class, Race, and The 'Double Discount', Florida State University Law Review, Vol. 37 (2010). The abstract:
What impact does a forced sale have upon a property owner's wealth? And do certain characteristics of a property owner such as whether they are rich or poor or whether they are black or white, tend to affect the price yielded at a forced sale? This Article addresses arguments made by some courts and legal scholars who have claimed that certain types of forced sales result in wealth maximizing, economic efficiencies. The Article addresses such economic arguments by returning to first principles and reviewing the distinction between sales conducted under fair market value conditions and sales conducted under forced sale conditions. This analysis makes it clear that forced sales of real or personal property are conducted under conditions that are rarely likely to yield market value prices. In addition, the Article addresses the fact that judges and legal scholars have utilized a flawed economic analysis of forced sales in cases that often involve property that is owned by low- to middle-class property owners in part because those who are wealthier own their property under more stable ownership structures or utilize private ordering to avoid the chance that a court might order a forced sale under the default rules of certain common ownership structures. The Article also raises the possibility for the first time that the race or ethnicity of a property owner may affect the sales price for property sold at a forced sale, resulting in a "double discount," i.e. a discount from market value for the forced sale and a further discount attributable to the race of the property owner. If minorities are more susceptible to forced sales of their property than white property owners or if there does exist a phenomenon in which minorities suffer a double discount upon the sale of their property at a forced sale, then forced sales of minority-owned property could be contributing to persistent and yawning racial wealth gaps.
December 03, 2010
Mixon on Home Mortgage Documents Interpreted as Nonrecourse Debt
John Mixon (Houston) has posted Fannie Mae/Freddie Mac Home Mortgage Documents Interpreted as Nonrecourse Debt (with Poetic Comments Lifted from Carl Sandburg), from the California Western Law Revew. The abstract:
Virtually no home mortgage borrower who has not had (1) extensive professional training, or (2) prior experience as a foreclosed borrower, understands that home mortgages include the potential of a hovering judgment lien for deficiency after foreclosure. This lack of understanding makes any pretense of consent to liability for deficiency after foreclosure pure rationalization. Law acts in complicity with lenders to commit virtual fraud when it imposes this consequence on home buyers without full disclosure and real, intelligent consent.
The language problem is not lack of formalistic disclosure of the terms of the home loan itself. Virtually all home mortgage transactions provide borrowers with disclosure statements that spell out the full terms of their loans. But the consequence of lingering liability after foreclosure, which can be far worse than a misstated interest rate, is not disclosed (and perhaps cannot be disclosed meaningfully) to lay borrowers. Even the standard FNMA/GNMA documents are ambiguous and subject to interpretation as non-recourse obligation. These documents dominate the field, and their uniform covenants apply throughout the United States' mortgage market. This article proposes that they be re-read and interpreted as not imposing recourse liability, thereby eliminating deficiencies after foreclosure for most homeowners.
October 12, 2010
Miller on Strategic Default
Meredith R. Miller (Touro) has posted Strategic Default: The Popularization of a Debate Among Contract Scholars, Cornell Real Estate Journal, Vol. 9, Forthcoming . The abstract:
A June 2010 report estimates that roughly 20% of mortgage defaults in the first half of 2009 were “strategic.” “Strategic default” describes the situation where a home borrower has the financial ability to continue to pay her mortgage but chooses not to pay and walks away. The ubiquity of strategic default has lead to innumerable newspaper articles, blog posts, website comments and editorial musings on the morality of homeowners who can afford to pay but choose, instead, to walk away. This Article centers on the current public discourse concerning strategic default, which mirrors a continuing debate among scholars regarding whether the willful breach of a contract has a moral element.
For those scholars that maintain that it is possible to describe and prescribe contract law with a general, unifying theory, the debate is primarily one between promise-based theories and economic theory. This debate between promissory and economic theory reflects a perpetual volley concerning whether contract law should reflect the primacy of morality or efficiency.
The argument of those that support strategic default reads like a case for efficient breach. Many of these commentators argue that the mortgage contract simply presents home borrowers with a choice: pay or surrender the property in foreclosure. If a homeowner is deep underwater, she is better off defaulting and the lender is no worse off relative to the bargain (after all, the lender agreed to foreclosure as a remedy). However, those who argue in favor of strategic default are counteracting a prevailing social norm that it is fundamentally immoral to willfully breach a contract. Many of the blog comments and even newspaper editorials have reflected a general sense that the homeowners who strategically default are acting shamefully.
The public discussion further mirrors the academic debate about whether encouraging efficient breach enables the greatest public good or, instead, undermines the very convention of contracting. On the one hand, strategic default serves as an example of how encouragement of breach of contract may lead to a breakdown of confidence in the marketplace and, in turn, could inhibit market activity. On the other, it is difficult to muster sympathy for lenders, whose imprudent loans are a large piece of the systemic problems that precipitated the housing crisis.
In the end, to the extent that questions of morality are nuanced and contextual, the example of strategic default elucidates the futility of either morality or efficiency as a unifying descriptive or normative theory of contract law. Indeed, it suggests that instead of focusing on individual contracts between borrowers and lenders, a more fruitful public discourse should be reframed to focus on appropriate systemic reforms to prevent the practices that played a part in devastating outcomes for the housing industry, families and communities. Because the concerns about strategic default – neighborhood depreciation and market collapse – are systemic, the solutions should be driven by those concerns, rather than shaming individual borrowers who decide to walk away.
October 05, 2010
Lefcoe on the Uses and Abuses of Tax Increment Financing
George Lefcoe (Southern California) has posted Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing. The abstract:
We're working on TIFs right now in my state & local government class. Students find these animals to be challenging and interesting, because they are very powerful drivers of land use yet fairly obscure to the general public. This article helps explain TIFs and put them in the context of land use debates over density, development, and urbanism.
October 5, 2010 in Community Design, Density, Development, Environmentalism, Finance, Local Government, New Urbanism, Pedestrian, Planning, Redevelopment, Scholarship, Suburbs, Transportation, Urbanism | Permalink | Comments (0) | TrackBack
August 14, 2010
Fannie & Freddie Bailout?
I really enjoyed reading the article linked in Chad's post yesterday, and the good points in the comments so far. I've linked or mentioned a few times about the need to rethink housing policy with respect to the primacy of homeownership. But with all the talk in the article and elsewhere of reforming or replacing Fannie and Freddie, there is talk in the wind of a different plan: a Fannie-Freddie Bailout.
James Pethokoukis, the Reuters money & politcs blogger, wrote recently about such a bailout as an August Surprise:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
Then a couple of days ago the Boston Globe published an op-ed by Paul McMorrow titled One More Bailout.
WHEN PRESIDENT Barack Obama signed legislation overhauling the nation’s financial regulations last month, he declared an end to Wall Street bailouts. Going forward, he said, failing finance houses won’t skirt by on the taxpayers’ dime. Bay State Representative Barney Frank characterized the new law as a death penalty for reckless institutions.
Both men are only half right. Congress has one more bailout to complete. That job — bringing Fannie Mae’s and Freddie Mac’s toxic balance sheets onto the government’s ledger — was left out of last month’s financial overhaul because the job is so massive and so politically unpalatable that it dwarfs every record-breaking handout that came before it.
That approach is also the only realistic option on the table.
Next Tuesday, policymakers will convene a summit to help determine what to do with Fannie and Freddie, the two government-owned mortgage giants. It’s bound to conclude that there’s little to do but nationalize them, stuff them with $300 billion in taxpayer funds, and hope that when they’re eventually able to stand on their own as semi-private corporations, the nation’s economy doesn’t implode again.
We'll we're certainly seeing mixed signals in the air about the future of housing, real estate, and land use in public policy and finance. Keep your eyes on Tuesday's Treasury meeting
August 14, 2010 in Affordable Housing, Budgeting, Federal Government, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions | Permalink | Comments (0) | TrackBack
August 10, 2010
Smith on the Structural Causes of Mortgage Fraud
James Charles Smith (Georgia) has posted The Structural Causes of Mortgage Fraud, forthcoming in the Syracuse Law Review, Vol. 60. The abstract:
I saw Prof. Smith present an early version of his research on mortgage fraud last year; he announced "tentatively, I'm against it." That cracked me up. Anyway, check out the paper.
August 06, 2010
Fennell & Roin on Residential Stakes
Lee Anne Fennell (Chicago) and Julie Roin (Chicago) have posted Controlling Residential Stakes, University of Chicago Law Review, Vol. 77, p. 143 (2010). The abstract:
As you might expect, this looks like a very interesting and important paper.
August 6, 2010 in Finance, Housing, Landlord-Tenant, Local Government, Mortgage Crisis, Mortgages, NIMBY, Property Theory, Real Estate Transactions, Scholarship, State Government | Permalink | Comments (0) | TrackBack
August 04, 2010
Marsico on the Home Mortgatge Disclosure Act at Thirty-Five
Richard D. Marsico (New York Law School) has posted Looking Back and Looking Ahead as the Home Mortgage Disclosure Act Turns Thirty-Five: The Role of Public Disclosure of Lending Data in a Time of Financial Crisis, published in the
July 12, 2010
Lehavi on the Global Law of the Land
Amnon Lehavi (Interdisciplinary Center Herzliyah - Radzyner School of Law) has posted The Global Law of the Land, University of Colorado Law Revew, vol. 81, p. 425 (2010). The abstract:
May 30, 2010
Two by White on Strategic Default
Brent T. White (Arizona) has posted two papers on the topic of strategic default by homeowners. First is The Morality of Strategic Default. The abstract:
May 26, 2010
Land Use Panel at Law & Society Association
This weekend is the always-excellent annual meeting of the Law & Society Association in Chicago. I haven't scoured the program, but there is sure to be a plethora of interesting panels and events. I do have firsthand knowledge, however, of one particular land-use panel that is guaranteed to present fascinating projects from interesting up-and-coming scholars.
Panel: Fri., May 28, 12:30-2:15
Chair: James J. Kelly, Jr. (University of Baltimore)
The Effects of SmartGrowth on the Preservation of Historic Resources, William J. Cook (Charleston School of Law)
Debtors' Environmental Impact: Structured Finance and the Suburbanization of Open Space, Heather Hughes (American University)
Sustainability and the Practice of Community Development, James J. Kelly, Jr. (University of Baltimore)
The Artifice of Local Growth Politics: At-Large Elections, Ballot Box Zoning, and Judicial Review of Land Use Initiatives, Kenneth Stahl (Chapman University)
May 26, 2010 in Charleston, Chicago, Community Economic Development, Conferences, Environmental Law, Finance, Financial Crisis, Historic Preservation, Local Government, Politics, Scholarship, Smart Growth, Suburbs, Sustainability | Permalink | Comments (0) | TrackBack
May 09, 2010
Belsky and Wachter on The Public Interest in Consumer and Mortgage Credit Markets
Eric S. Belsky (Harvard--Joint Center for Housing Studies & Graduate School of Urban Design) and Susan M. Wachter (Penn--Wharton, Real Estate) have posted The Public Interest in Consumer and Mortgage Credit Markets. The abstract:
May 07, 2010
Hughes on Enabling Investment in Environmental Sustainability
Heather Hughes (American University) has posted Enabling Investment in Environmental Sustainability, Indiana Law Journal, Vol. 85, No. 2 (2010). The abstract:
This Article proposes an “environmental practices money security interest” (EPMSI) that could be added to Uniform Commercial Code (UCC) Article 9 to facilitate transactions that enable good environmental practices. EPMSI rules would grant priority over earlier investors to financers whose extensions of credit enable debtors to invest in improving environmental impact. This work suggests that we should not rely exclusively on government subsidies such as tax credits and subsidized loans to induce investments in improved environmental impact when we could also enact commercial law devices that do so. An EPMSI would add to states’ legislative efforts to address climate change by enabling companies to issue high-priority debt to finance improvements in sustainability. Article 9’s blend of first-in-time priority rules and later-in-time interests that enjoy exceptions to these rules is, essentially, about benefits and drawbacks of new money. As we consider these benefits and drawbacks, two points about Article 9 become important: first, legal scholars overstate the extent to which the purchase-money rules avoid dilution risk by limiting purchase-money collateral to new goods, and, second, scholars overlook the existence of production-money interests in agricultural finance in analyses of Article 9 and interests with later-in-time priority. Ultimately, levels of commitment to mechanisms for private funding of improved environmental sustainability, and of tolerance for risk of dilution to secured creditors’ positions, are for collective determination. Through making a concrete reform proposal, this Article intends to animate, in the context of UCC Article 9, questions about environmental costs and financing of improvements in sustainability.
An environmental law article focusing on the UCC? This will warm the heart of my South Texas colleague and noted UCC apologist Tim Zinnecker. Looks like a very interesting and innovative approach.
April 13, 2010
Krugman on Georgia Bank Failures
Illustrious economist and New York Times columnist Paul Krugman has directed his learned attention toward the failure of small banks in Georgia. Why? Embarrassingly enough, it's because Georgia leads the nation in bank failures, and the majority of those banks are small.
Georgia is part of what Krugman charmingly labels "Flatland" - where "permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble." In most of Flatland, by Krugman's reckoning, no housing bubble means fewer bad mortgages means fewer bank failures. No so in Georgia.
Georgia’s debacle is that it doesn’t seem to have anything to do with the issues that have dominated debates about banking reform. For example, many observers have blamed complex financial derivatives for the crisis. But Georgia banks blew themselves up with old-fashioned loans gone bad.
And for all the concern about banks that are too big to fail, Georgia suffered, if anything, from a proliferation of small banks. Actually, the worst offenders in the lending spree tended to be relatively small start-ups that attracted customers by playing to a specific community. Thus Georgian Bank, founded in 2001, catered to the state’s elite, some of whom were entertained on the C.E.O.’s yacht and private jet. Meanwhile, Integrity Bank, founded in 2000, played up its “faith based” business model — it was featured in a 2005 Time magazine article titled “Praying for Profits.” Both banks have now gone bust.
So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.
Krugman's formula for reform in Georgia is better protections against predatory lending. Former Democratic Governor (and predatory lending lawyer) Roy Barnes tried hard for those protections when he was in office, only to have them later rolled back. Will this latest crisis change that calculation? Probably depends on the next governor, who might be - Roy Barnes. Predictions about how that race might come out are probably beyond even Krugman's prognosticating skills.
Jamie Baker Roskie
April 10, 2010
Malloy on Mortgage Market Reform and the Fallacy of Self-Correcting Markets
Robin Paul Malloy (Syracuse) has posted Mortgage Market Reform and the Fallacy of Self-Correcting Markets, Pace Law Review, Vol. 30, p. 79 (2009). The abstract:
The article discusses the mortgage market collapse in connection to the broader financial crisis. In developing the argument I proceed in several steps. First, I discuss the fallacy of self-correcting markets as a way of explaining the need for volitional and purposeful regulation in the housing and mortgage markets. This involves explaining that markets are not self-correcting; while Alan Greenspan and company waited for the invisible hand to appear and correct the mortgage markets, the system collapsed. Second, I provide an overview of the basic exchange relationships among the parties involved in the underlying real estate transaction, those in the primary and secondary mortgage market, and potential investors in mortgage related securities. Third, I explain the inapplicability of Hernado DeSoto's idea of parallel lives between underlying real estate transactions and the market for securities based on the mortgages in these underlying transactions. And, fourth, I suggest a series of regulatory and transactional reforms to consider for improving the soundness of the underlying real estate transaction and the operation of the primary mortgage markets. These reforms include: taking steps to reduce speculation in housing prices; eliminating incentives for over borrowing and over lending; and, adjusting the structure of the underlying real estate transaction to undermine an inverse prisoner’s dilemma problem. I also suggest that lawyers reassert themselves into doing basic real estate transactions and that real estate sales people and others be restricted to simply doing the sales work that they are trained to do.
March 06, 2010
Burkhart on Manufactured Housing and Real Estate Finance
Speaking of modular housing, as Jamie Roskie does below, Ann Burkhart (Minnesota) has posted Bringing Manufactured Housing into the Real Estate Finance System, forthcoming in the Pepperdine Law Review. The abstract:
Eight percent of the United States population - more than 23 million people - live in manufactured homes (also called mobile homes). In some years, more than 30% of the new homes sold have been manufactured. Moreover, manufactured housing is the most important form of unsubsidized affordable housing in this country. Up to two-thirds of the new affordable homes built each year have been manufactured. However, the manufactured housing industry currently is struggling to survive a meltdown in its sales and finance markets. A tremendous obstacle to the industry’s recovery is that most manufactured homes are characterized as personal property, though they have evolved tremendously from their earliest ancestor, the travel trailer. Today, only 1% of manufactured homes are moved after being sited on a lot. Recharacterizing manufactured homes as real property would reflect modern reality and would provide purchasers and owners with access to the mortgage market, which would increase credit availability and affordability and would provide manufactured home owners the same legal protections that owners of site-built homes enjoy.
March 04, 2010
Reiss on Fannie and Freddie
David J. Reiss (Brooklyn) has posted Fannie Mae and Freddie Mac: Creatures of Regulatory Privilege, published in FINANCIAL INSTITUTIONS AND MARKETS: CURRENT ISSUES IN FINANCIAL MARKETS, Robert R. Bliss, George G. Kaufman, eds., 2010. The abstract:
This book chapter addresses the appropriate role of Fannie Mae and Freddie Mac, the government-chartered, privately owned mortgage finance companies, in the United States housing finance sector. The federal government recently placed Fannie and Freddie in conservatorship. These two massive companies are profit-driven, but as government-sponsored enterprises they also have a government-mandated mission to provide liquidity and stability to the United States mortgage market and to achieve certain affordable housing goals. How the two companies should exit their conservatorship has implications that reach throughout the global financial markets and are of key importance to the future of American housing finance policy.
While the American taxpayer will be required to fund a bailout of the two companies that will be measured in the hundreds of billions of dollars, the current state of affairs presents an opportunity to reform the two companies and the manner in which the residential mortgage market is structured. Few scholars, however, have provided a framework in which to conceptualize the possibilities for reform.
This book chapter employs regulatory theory to construct such a framework. A critical insight of this body of literature is that regulatory privilege should be presumed to be inconsistent with a competitive market, unless proven otherwise. The federal government’s special treatment of Fannie and Freddie is an extraordinary regulatory privilege in terms of its absolute value, its impact on its competitors and its cost to the federal government. Regulatory theory thereby clarifies how Fannie and Freddie have relied upon their hybrid public/private structure to obtain and protect economic rents at the expense of taxpayers as well as Fannie and Freddie’s competitors.
Once analyzed in the context of regulatory theory, Fannie and Freddie’s future seems clear. They should be privatized so that they can compete on an even playing field with other financial institutions and their public functions should be assumed by pure government actors. While this is a radical solution and one that would have been considered politically naïve until the recent credit crisis, it is now a serious option that should garner additional attention once its rationale is set forth.