Monday, November 8, 2010

Adverse Possession and the Foreclosure Crisis?

This New York Times article, At Legal Fringe, Empty Houses go to the Needy, tells the story of a guy in Florida who seems to be attempting to use adverse possession to take abandoned homes and then lease them for low rent to needy families.  

NORTH LAUDERDALE, Fla. — Save Florida Homes Inc. and its owner, Mark Guerette, have found foreclosed homes for several needy families here in Broward County, and his tenants could not be more pleased. Fabian Ferguson, his wife and two children now live a two-bedroom home they have transformed from damaged and abandoned to full and cozy.

There is just one problem: Mr. Guerette is not the owner. Yet.

In a sign of the odd ingenuity that has grown from the real estate collapse, he is banking on an 1869 Florida statute that says the bundle of properties he has seized will be his if the owners do not claim them within seven years.

A version of the same law was used in the 1850s to claim possession of runaway slaves, though Mr. Guerette, 47, a clean-cut mortgage broker, sees his efforts as heroic. “There are all these properties out there that could be used for good,” he said.

Apparently most of the homes are in foreclosure.  Guerette has taken possession, made some improvements, and is paying the property taxes.  The tenants and the neighbors--at least the ones quoted in the article, who understandably prefer occupied to abandoned houses next door--think he is doing a great thing.  The State of Florida disagrees.  He is being prosecuted for fraud.  

Is this an innovative response to the foreclosure crisis, or is it a scam?  No one likes adverse possession in theory when they first hear about it.  Students always ask, like Jennifer Aniston in Office Space, "so how is that not stealing?"  But of course the justification for AP--we prefer that abandoned land go to someone who will put it to its highest and best use--seems to have some application here.  On the other hand, this certainly isn't a "good faith" trespass under a belief in legitimate title.  The article quotes Florida law prof Michael Allan Wolf, who expresses concern that using adverse possession this way can lead to a serious disruption in chains of title and with the foreclosure process.  And it's not hard to see how this kind of activity could lead to widespread confusion and potential fraud.  

If this idea takes it a little too far, then what can we do about the parallel problems of massive foreclosures, abandoned buildings, and the lack of affordable housing?  Thanks to Scott Rempell for the pointer.  

Matt Festa

November 8, 2010 in Affordable Housing, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property, Property Theory, Real Estate Transactions, Suburbs, Sun Belt | Permalink | Comments (1) | TrackBack (0)

Thursday, October 14, 2010

Levitin and Wachter on Information Failure and the U.S. Mortgage Crisis

Adam J. Levitin (Georgetown) and Susan M. Wachter (Penn--Wharton, Real Estate) have posted Information Failure and the U.S. Mortgage Crisis.  The abstract:

This paper argues that during the housing bubble, housing finance markets failed to price risk correctly because of information failure caused by the complexity and heterogeneity of private-label mortgage-backed securities and structured finance products. Addressing the informational problems with mortgage securitization is critical not just for avoiding future housing bubbles but for rebuilding American housing finance. The continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression, depends on the continued viability of securitization. The paper proposes that mortgage securitization and origination be standardized as a way of reducing complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

Matt Festa

October 14, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, 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.

Matt Festa

October 12, 2010 in Contracts, Finance, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 7, 2010

Report: Housing Market 2010 First Half Recap

The excellent Real Estate Center at Texas A&M University has issued its report on the Housing Market: 2010 First Half Recap.  Authored by research economist James P. Gaines, the report has analysis of the national and Texas markets and a preliminary forecast for the next six months.  It's a quick read.  From the analysis:

The housing market during the first half of 2010 showed marked improvement over the same period in 2009 largely attributable to unprecedented government stimulation. Year-over-year data comparisons for the first six months of 2010 with the same period in 2009, when the original tax credit was just getting under way, suggest an improving market. However, sustainability during the second half of the year with no incentives remains questionable.

Going forward?

The second half of 2010 holds significant challenges for the housing market. It remains to be seen to what extent the private market can support the market without significant government inducements. Pending sales, nationally and in most Texas communities, and applications for purchase mortgage financing are depressed substantially, indicating much-reduced sales volumes in the next few months.

Dr. Gaines concludes, however, that if there is less-than-exepected dropoff in the coming months, it could be a sign of economic recovery.  If you're not familiar with the Real Estate Center, they are an outstanding resource for reports and data; they also have a regular listserv and podcast.  

Matt Festa

September 7, 2010 in Federal Government, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Thursday, August 26, 2010

Samuelson on The Homeownership Fetish and the American Dream

Robert J. Samuelson (Newsweek/Washington Post economics columnist) has an article called Remodeling the American Dream (Newsweek) or alternatively How a Homeownership Fetish Hurt the American Dream (WaPo).  Samuelson writes about some of the topics we have been talking about here, such as the question of whether the overpromotion of home ownership as national policy inflated the bubble that burst into the mortgage crisis.  The article begins:

The question of what to do about Fannie Mae and Freddie Mac -- the two government-created enterprises that have backed massive loans to the housing market -- involves much more than finance or real estate. It marks the end of an era. The relentless promotion of homeownership as the embodiment of the American dream has outlived its usefulness. . . .

Unfortunately, we let a sensible goal become a foolish fetish.

Samuelson goes on to critique the Fannie/Freddie story but pulls back from the precipice of radical reform in conclusion:

"This is not a good time to make permanent solutions for housing," says Guy Cecala, publisher of Inside Mortgage Finance. The single-minded promotion of homeownership failed and, paradoxically, undermined the American dream. It contributed to the housing "bubble" and favors housing investment over new industries and technologies. But to end it, we need to make haste slowly.

Matt Festa

August 26, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Saturday, 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

Matt Festa

August 14, 2010 in Affordable Housing, Budgeting, Federal Government, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Saturday, August 7, 2010

The Atlantic on How Texas is Dominating the Recession

I'm back in Houston from a visit to points far north.  I thought up some blog posts while traveling, but I'll mark my return to the Lone Star State with a link to this article from The Atlantic by Derek Thompson: How Texas is Dominating the Recession

SAN ANTONIO -- No state is thriving in the wake of the Great Recession. But compared to the rest of the country, Texas is experiencing something like an economic boom.

Thompson offers four reasons for Texas' relative success: (1) a late start; (2) stable real estate; (3) the right mix of industries and economic activities; and (4) "something about Texas," particularly its taxing and regulatory climate.  More on reason #2:

2. Stable Real Estate
Real estate executives and economists struggled to find one reason why the Texas economy largely avoided the real estate boom and bust, but a few theories emerged. First, San Antonio Mayor Julian Castro suggested that a reliance on property taxes in Texas (compared to California) might have dulled real estate appreciation. Second, the banks that survived the Savings and Loan crisis in the 1980s have mostly held onto conservative and un-exotic lending practices. Third, land and utilities are generally cheaper throughout Texas, which holds down the cost of the living. Fourth, besides Dallas, Texas' major cities have diversified away from the kind of real estate and financial services addiction that plagued CaliFlAriVada (that's CA, FL, AZ, NV), where the recession has been the most severe.

Matt Festa

August 7, 2010 in Economic Development, Financial Crisis, Houston, Real Estate Transactions, State Government, Texas | Permalink | Comments (1) | TrackBack (0)

Wednesday, August 4, 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 Review of Banking and Financial Law, Vol. 29, No. 205, 2009-2010.   The abstract:

This article examines the history of the Home Mortgage Disclosure Act (HMDA) and makes proposals for improving it to help prevent another economic crisis. Passed in 1975, HMDA requires most lenders to disclose information about their home mortgage loans, including the number of home mortgage applications it received; the purpose of each application; the type of loan; the decision on the application; the race, gender, and income of the loan applicant/borrower; the location of the loan and the median income and racial composition of the neighborhood; and the interest rate on the loan. HMDA was originally conceived of as a tool to detect and prevent redlining. It was later expanded to cover lending discrimination and reverse redlining. However, Congress and the Federal Reserve have not required lenders to disclose enough information to permit HMDA to do its job. The pending financial reform legislation would expand HMDA's mission to detect and prevent predatory lending, but once again, the legislation does not require lenders to disclose sufficient information to accomplish its goal. The article proposes several types of information that should be added to the legislation, including, most importantly, the applicant's housing debt/income ratio and overall debt/income ratio.

Matt Festa

August 4, 2010 in Finance, Financial Crisis, History, Housing, Mortgage Crisis, Mortgages, Race, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 13, 2010

Leinberger (vs. Kotkin): Walking--Not Just for Cities Anymore

On The New Republic's excellent "The Avenue" blog, Christopher Leinberger (author of The Option of Urbanism) discusses a recent Brookings debate with Joel Kotkin (author of The Next Hundred Million: America in 2050).  From Walking--Not Just for Cities Anymore, Leinberger notes:

I just had a debate with Joel Kotkin, whom many consider to be an apologist for sprawl. Surprisingly, there is a convergence between his view of the next generation of real estate and infrastructure development and mine: a constellation of pedestrian-friendly urban development spread throughout metropolitan areas, redeveloping parts of the central city and transforming the inner, and some outer, suburbs. There are certainly differences between the two of us: I happen to see significant pent-up demand for walkable urban development and massive over-building of fringe car-oriented suburban housing and commercial development.

In fact, I see compelling evidence that the collapse of fringe drivable suburban markets was the catalyst for the Great Recession, and the lack of walkable urban development due to inadequate infrastructure and zoning is a major reason for the recovery’s sluggishness. Joel feels the demand for walkable urban development is a fraction of the future growth in households. I think rail transit, biking and walking infrastructure are crucial to make this walkable urban future happen; Joel thinks bus rapid transit is as far as we have to go in the transit world… making cars more technologically efficient is his main answer.

I have been hoping that Leinberger will prove correct about his belief in the untapped market demand for walkable urbanism, which has not persuaded Kotkin and other critics.  Leinberger concludes:

We need move away from 20th century concepts that confuse the conversation. If I am right, 70 to 80 percent of new development should be in walkable urban places, and my research leads me to think the majority of that development will be in the suburbs.

Matt Festa

July 13, 2010 in Density, Development, Downtown, Exurbs, Financial Crisis, Local Government, Mortgage Crisis, New Urbanism, New York, Pedestrian, Planning, Sprawl, Urbanism, Zoning | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 23, 2010

Florida says Homeownership is Overrated (WSJ)

Richard Florida, one of the leading public intellectuals on the future of cities and the originator of the "Creative Class" concept, had an interesting article in the Wall Street Journal last week: Homeownership is Overrated: Today's economy requires a more mobile workforce.  After acknowledging the important role that homeownership has played in cultural conceptions of the "American Dream" for the last several generations, Florida critiques the norm:

Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors. As we expected, the rates of homeownership are greatest where housing prices are lowest. But cities with high levels of homeownership—in the range of 75%, like Detroit, St. Louis and Pittsburgh—had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.

Now I think there are two different questions here that Florida doesn't distinguish: (1) whether homeownership is good for individual homeowners; and (2) whether it is good for society at large.  But Florida makes some excellent points.  He goes on to make a policy prescription that I think is long overdue, particularly from the left:

First and foremost, the Obama administration should end its ongoing measures to prop up the housing market. The massive federal subsidies for homeownership, which totaled some $230 billion in 2009 according to the Congressional Budget Office, should be phased out, and the tax deduction for mortgage interest eliminated.

Amen.

The next critical step is to encourage the transition to more and better rental housing. Multifamily housing is one of the few profitable bright spots in a ravaged housing industry. There are thousands upon thousands of unsold condos and foreclosed homes that can and should become rentals.

Florida concludes with a much-needed questioning of the cultural assumption that property ownership is the sine qua non of the "American Dream":

A "home of one's own" has been the emblem of prosperity and stability for a very long time. The idea is rich with psychological and cultural significance, but we have come to an economic juncture where we must re-examine even our most cherished beliefs. We can begin by updating our definition of the American Dream.

Matt Festa

June 23, 2010 in Development, Federal Government, Financial Crisis, Housing, Mortgage Crisis, Real Estate Transactions | Permalink | Comments (4) | TrackBack (0)

NYT on the Housing Market Slowdown

Speaking of New York Times features on the real estate market and mortgage crisis, they had this one last week: Housing Market Slows as Buyers Get Picky.  

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price. . . . 

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided. 

Bad news for the housing and construction industries, and a possible signal of a double-dip recession.  I think that last part about the $8000 tax credit is telling.  Once again, the market for housing was artificially propped up by a policy decision to promote home ownership.


Matt Festa

June 23, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (1) | TrackBack (0)

Institute for Justice on Kelo at Five Years

The Institute for Justice has published a white paper commenting on the fifth anniversary of the Kelo decision: Five Years After Kelo: The Sweeping Backlash Against One of the Supreme Court’s Most-Despised Decisions.  The IJ, you may remember, was lead counsel for the homeowner plaintiffs in the case.  The paper, of course, expresses IJ's continued opposition to the SCOTUS ruling, but nonetheless seems to strike a cautiously optimistic note regarding eminent domain in the wake of the Kelo backlash.  From the intro:

Less than one week after the decision was handed down, the Institute for Justice launched a national campaign called “Hands Off My Home.”  IJ was determined to focus the outrage over Kelo and turn it into meaningful reform.   In the five years since the decision, there has been an unprecedented backlash against the Kelo ruling in terms of public opinion, citizen activism, legislative changes, state court decisions, and lessons learned from the New London case . . .

There is another paragraph in the conclusion that I find very interesting.  Back when Pfizer moved out of its New London facility, I suggested on the New York Times "Room for Debate" Blog that the failure of the New London plan, and the Kelo backlash generally, might work to discourage planners and local governments from pursuing economic development takings (I called the Pfizer/New London debacle "Exhibit A" in the case against eminent domain for comprehensive redevelopment).  Ilya Somin, who was involved in the case, and has done the definitive research on the problems and loopholes of the post-Kelo state "reform" legislation, agreed that the backlash was significant but thought I might have been too optimistic about the deterrent effect of the backlash.  I agreed that I was in fact expressing an optimistic viewpoint--if I had had to bet money, I probably would have gone with Somin's more realistic prediction.  And I still have absolutely no empirical data at hand regarding the rate of economic development takings since Kelo.  But the IJ's report seems to indicate that there has been at least a slowdown in litigation on the issue:

The results of the Kelo backlash have been striking.  The Institute for Justice used to get continual requests for assistance in fighting eminent domain for private gain.  Now, we receive far fewer.  Of those, many are defeated by activism in the court of public opinion before they ever reach a court of law.  Eminent domain abuse used to be a nationwide epidemic with more than 10,000 instances reported in just one five-year period alone, an epidemic that affected property owners in most states.[20]  Now, it is largely a problem confined to certain reform-resistant states, like New York, that refuse to change their laws or listen to their own citizens.  The Institute is focusing its efforts in litigation and advocacy in those states.

It was exactly that "court of public opinion" effect that I had in mind.  Now of course, a slowdown in litigation requests to IJ doesn't necessarily mean there is less eminent domain out there.  And there are two obvious counterarguments: (1) there are fewer requests to IJ because Kelo essentially declared economic development takings to be legal and constitutional, so there may be fewer disputes over such takings when they happen; (2) in the recession, planners and local governments are less eager for purely economic reasons to do New London-style redevelopment projects.  And just because there might be less interest-group litigation doesn't mean that the issue has faded as a serious legal and policy matter.

Still, it's an interesting take on the political and policy effects of the Kelo backlash five years after the opinion.  Thanks to Brian Erskine for the pointer.

UPDATE: Ilya Somin has his thoughts on Kelo's fifth here

Matt Festa

June 23, 2010 in Caselaw, Economic Development, Eminent Domain, Financial Crisis, Judicial Review, Local Government, Property Rights, Property Theory, Redevelopment, Scholarship, Takings | Permalink | Comments (3) | TrackBack (0)

Scarberry's Reply to Levitin on Bankruptcy Modification of Home Mortgages

Mark S. Scarberry (Pepperdine) has posted a Reply to Adam Levitin's Response to Scarberry's Symposium Article (which was itself a "Critique"Levitin's work)--ok, I think I have that straight.  At any rate, it's a very interesting and important debate.  Scarberry's Reply is Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response, and is published at Pepperdine Law Review, Vol. 37, p. 1277, 2010.  The abstract:

Professor Adam Levitin has responded to my recent symposium article critiquing proposed congressional legislation that would allow modification (including strip down) of home mortgages in Chapter 13 bankruptcy. A portion of my Critique criticized his empirical studies concerning the likely effect of the proposed legislation on mortgage interest rates and availability, and also criticized the arguments he has made in support of the proposed legislation. The Critique did note, however, that the insight involved in conceiving of such empirical studies was impressive.

Surprisingly, Professor Levitin’s Response fails to deal with the substantial case authority discussed in my Critique. He treats the Critique’s case authority on a critical question as if it consisted only of one relatively recent Ninth Circuit case and supposed dicta from an “old” Second Circuit case. But the Critique in fact relies on about twenty cases that deal with the question; the only supposedly contrary case authority he discusses in his Response turns out to be one of the cases cited in my Critique and not to be contrary at all. The case authority shows that the main defense put forward in his Response - that the mortgage modifications that would be permitted under the proposed legislation are similar to those permitted before the Supreme Court’s 1993 Nobelman decision and similar to those currently permitted where the collateral is not the debtor’s principal residence - is simply untenable.

It is also surprising that the entire weight of his defense of the empirical studies rests (A) on a very likely mistaken view of the law - that the law permits Chapter 13 debtors to use a novel, flawed approach in modifying secured claims under current law - and (B) on two remarkably bold and implausible assertions regarding how the market data he collected supposedly should have reflected the risk that debtors might use that novel, flawed approach, even though his data was collected before anyone had suggested that debtors might even try to do so. In addition, one of Professor Levitin’s assertions, if accepted, would fatally undermine
the design of a key part of his empirical studies.

The article notes in conclusion that law professors and others who have taken divergent positions on the wisdom of the congressional proposals might yet be able to agree on a common-sense middle ground; there is no need to consider those who disagree with us as having been seduced by the Dark Side.

The citation for my Critique is Mark S. Scarberry, A Critique of Congressional Proposals to Permit Modification of Home Mortgages in Chapter 13 Bankruptcy, 37 Pepp. L. Rev. 635 (2010). The Critique is available at http://ssrn.com/abstract=1520794. The citation for Professor Levitin’s Response to the Critique is Adam J. Levitin, Back to the Future with Chapter 13: A Response to Professor Scarberry, 37 Pepp. L. Rev. 1261 (2010). His Response is available at http://ssrn.com/abstract=1534912. The citation for this Reply is Mark S. Scarberry, Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response, 37 Pepp. L. Rev. 1277 (2010). 

I appreciate Prof. Scarberry including the citations to the other articles in the debate in his abstract--saves me a lot of work!  More importantly, this dialogue addresses one of the key issues in the mortgage crisis.  

Matt Festa
 

June 23, 2010 in Federal Government, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Monday, June 21, 2010

NYT on the Costs of Seizing Fannie & Freddie

Over the weekend this story by Binyamin Applebaum was featured on the front page of the New York Times: Cost of Seizing Fannie and Freddie Surges for Taxpayers

CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords. . . .

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.

The article has some good vignettes of how the Fannie-Freddie "rescue" process is playing out in communities like the featured one in Arizona, where private contractors are paid to maintain, renovate, and try to resell the foreclosed homes.  The article also gives a short but interesting background on Fannie and Freddie.

Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors. . . .

“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.

As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.

The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. . . .

I think the interesting question for the future is whether we are willing or able to reassess the idea of homeownership as the American Dream, and the extent to which we (over)promote homeownership as a public policy. 

Matt Festa

June 21, 2010 in Federal Government, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Suburbs, Sun Belt | Permalink | Comments (0) | TrackBack (0)

Saturday, June 12, 2010

Fennell on Possession Puzzles

Lee Anne Fennell (Chicago) has posted Possession Puzzles, delivered originally as the Wolf Family Lecture on the American Law of Real Property at Florida, to be published in POWELL ON REAL PROPERTY, Michael Allan Wolf, ed., 2010.  The abstract:

This brief essay was delivered in slightly different form as the Third in the Wolf Family Lecture Series on the American Law of Real Property at the University of Florida Levin College of Law on March 17, 2010. In it, I use the foreclosure crisis as a springboard for exploring some foundational questions about the relationship between property rights and secure possession. Although the development of property rights is generally viewed as advancing security of tenure, this is true only up to a point; the ability to subdivide and alienate interests in property ultimately encompasses alienation of certain aspects of the option to remain in possession. Cutting back on property’s alienability comes at a high price, however – reduced access to the very possession one might hope to maintain. After framing the basic tradeoff between access and security, I examine some ways that both values might be pursued simultaneously through the further refinement of property rights.

Matt Festa

June 12, 2010 in Financial Crisis, Housing, Mortgage Crisis, Property Rights, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, 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: Managing the American Dream: Land Use and the Politics of Growth after the Mortgage Crisis.  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)

The abstract:

Land Use is one of the most interdisciplinary areas of legal theory and practice, yet in today's environment there are common issues facing land use planners. The goals of promoting growth, land development, and property ownership are in tension with emerging priorities such as growing “smart,” reducing sprawl, and sustainability. These issues expand across borders and regions yet remain intricately tied to local politics. The mortgage and financial crises have impacted the land use environment for governments, communities, and landowners. This panel explores contemporary land use challenges from the perspectives of local growth politics, sustainability and community development, smart growth and historic preservation, and the impact of policies promoting home ownership.

I had really hoped to be there for this panel, and I am very disappointed that I won't be able to make it.  But perhaps since Will, Jim, Ken, and (I hope) Heather are friends of the blog, perhaps we might be lucky enough to get a report, and we'd love to host more discussion of these forthcoming papers on the blog (hint, hint!).  At any rate, if you are going to LSA or will be in the Chicago area, I highly recommend that you attend.
Matt Festa

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 (0)

Saturday, May 22, 2010

Federal Eminent Domain on the Border?

In another example confirming my belief that every legal and policy issue ultimately has land use implications, here's an article that touches on border control, the federal stimulus package, agriculture, and eminent domain.  From the northern border: Vermont farmer draws a line at US bid to bolster border: Homeland Security threatens to seize 4.9 acres.

FRANKLIN, Vt. — The red brick house sits unassumingly on a sleepy back road where the lush farmlands of northern Vermont roll quietly into Canada. This is the Morses Line border crossing, a point of entry into the United States where more than three cars an hour constitute heavy traffic.

The bucolic setting of silos and sugar maples has become the focus of a bitter dispute that pits one of America’s most revered traditions — the family-owned farm — against the post-9/11 reality of terror attacks on US soil.


The Department of Homeland Security sees Morses Line as a weak link in the nation’s borders, attractive to terrorists trying to smuggle in lethal materials. The government is planning an estimated $8 million renovation here as part of a nationwide effort to secure border crossings.


It intends to acquire 4.9 acres of border land on a dairy farm owned for three generations by the Rainville family. Last month, the Rainvilles learned that if they refuse to sell the land for $39,500, the government intends to seize it by eminent domain.


The Rainvilles call this an unjustified land-grab by federal bullies.

Would it make more sense to close such a little-used facility, whether on fiscal grounds or to avoid resort to federal eminent domain?  

Matt Festa

May 22, 2010 in Agriculture, Eminent Domain, Federal Government, Financial Crisis | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 19, 2010

AALS Mid-Year Meeting on Property

Next month the American Association of Law Schools will have its mid-year meeting in New York, and one of the three primary subject matter workshops this year is the Workshop on Property, June 10-12.  There will be a terrific program focusing on the property law implications of two major issues: the mortgage crisis, and global warming.  Check out the brochure.  From the write-up:

Why Attend? Two major crises in the last few years have exposed deep tensions and pressures on our understanding of property law.  The foreclosure of more than 2 million homes, and the anticipated default of another 6 million mortgages has shaken common notions about the ability of consumers to understand real estate transactions and the terms of their mortgage contracts, posed stark questions about the failure of the law to limit the ability of the market to produce property transactions that created significant principal/agent costs, moral hazards, and externalities, and presented challenging questions about racial disparities in access to prime credit and in the underwriting of troublesome new mortgage products.  Similarly, vigorous debates over the responsibility of industrialized countries to control global warming, the need to protect future generations from the effects of global warming, and the fair allocation of the burdens of reducing greenhouse gases similarly have posed challenging questions about the regulation of risk from activities on private property, the nature of property owners’ obligations to future generations, and the failure of regulation to control externalities from the use of property.  Both crises raise serious theoretical and practical challenges to traditional notions about the comparative advantages of the free market, our ability to craft property laws that limit systematic risk without unduly discouraging innovation, and the continuing inability of the law to prevent racial discrimination, exclusion and exploitation. . . .

Who Should Attend? This workshop should be of interest to teachers of Property Law, Real Estate Transactions, Land Use Law, Environmental Law, Natural Resources, Indian Nations and Indigenous Peoples, Regulation, Financial Instruments, and Law and Economics.  The workshop is designed to benefit property law teachers at all levels of experience.  Our speakers and group leaders will include many of the most prominent and established people in the field, and also a substantial number of newer voices.

The early bird registration deadline is this Friday, May 21.  See the website to register.  Hope to see you all there!

Matt Festa

May 19, 2010 in Climate, Conferences, Environmental Law, Financial Crisis, Mortgage Crisis, New York, Property, Real Estate Transactions, Scholarship, Teaching | Permalink | Comments (0) | TrackBack (0)

Sunday, May 9, 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:

This paper examines mortgage credit markets and the need for government intervention to protect and advance the public interest. We identify as rationales for the public interest: positive and negative externalities, the promotion of equal access, and information asymmetry and principal agent problems. We point to the role of market conduct and structure, as well as information asymmetry and principal agent problems, as prominent sources for the US mortgage debacle. While it is beyond the scope of this paper to outline a reform program, this paper points, in the aftermath of the crisis, to a need for a framework to address information and principal agent issues in the conduct and structure of mortgage markets. As a new framework for mortgage markets is developed, attention needs to be placed on the role that information on loan quality and pricing plays for borrowers’ and investors’ appropriate pricing and allocation of capital.

Matt Festa

May 9, 2010 in Finance, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 5, 2010

HUD's Report to Congress on the Root Causes of the Foreclosure Crisis

Christopher E. Herbert (Abt Associates, Inc.) & William C. Apgar (Abt Associates, Inc.) have posted Report to Congress on the Root Causes of the Foreclosure Crisis.  The report appears to be the official report to Congress by HUD's Office of Policy Development & Research, based on a draft by the two authors as contractors.  The abstract:

This study of the root causes of the current extremely high levels of defaults and foreclosures among residential mortgages represents the final report to Congress by the Secretary of the Department of Housing and Urban Development (HUD) pursuant to Section 1517 of the Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289). The problems in the mortgage market are routinely referred to as a “foreclosure crisis” because the level of defaults and foreclosures greatly exceed previous peak levels in the post-war era and, as a result, have drawn comparisons to the levels of distress experienced in the Great Depression. This report contains a review of the academic literature and industry press on the root causes of the current foreclosure crisis, data and analysis of trends in the market, and policy responses and recommended actions to mitigate the current crisis and help prevent similar crises from occurring in the future.

Matt Festa

May 5, 2010 in Federal Government, Financial Crisis, HUD, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)