Thursday, 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. 

Jim K.

January 20, 2011 in Caselaw, Finance, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions, Remedies | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 19, 2011

Marsh on Foreclosures and the Failure of the American Land Title Recording System

Tanya D. Marsh (Wake Forest) has posted Foreclosures and the Failure of the American Land Title Recording System.  The abstract:

In this essay, Marsh argues that the current foreclosure crisis should serve as a wake-up call for a long-overdue modernization of the American land title recording system. Lenders invented the Mortgage Electronic Registration System (MERS) because the land title system, developed in a far different time and place, failed to meet the needs of the modern real estate industry. But a private MERS-like system is not the answer. Instead, Marsh argues that the federal government should implement a solution that replaces both the existing local land title system and MERS.

An ideal system should be organized around some clear principles. It should be transparent. It should be easy to search, through dynamic, robust indexing, and easy to access, preferably through the Internet. Documents in PDF form should be down-loadable. Electronic filing should be facilitated. There should be uniformity and consistency in the rules governing the form and substance of documents eligible for recording. The system should be public. Establishing and protecting a clear registry of property interests is and should continue to be an essential function of government.

Matt Festa

January 19, 2011 in Federal Government, Financial Crisis, Mortgage Crisis, Mortgages, Scholarship | Permalink | Comments (0) | TrackBack (0)

Saturday, 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?

Jim K.

kellyj@wlu.edu

January 15, 2011 in Caselaw, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (2) | TrackBack (0)

Thursday, December 23, 2010

Levitin & Twomey on Mortgage Servicing

Adam J. Levitin (Georgetown) and Tara Twomey (Nat'l Consumer Law Center, Nat'l Ass'n of Consumer Bankruptcy Attys) have posted Mortgage Servicing, Yale Journal on Regulation, Vol. 28, No. 1 (2011) [first 2011 pub date on the blog so far?].  The abstract:

This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis.

A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized. Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.

Servicers’ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors’ interest in maximizing the net present value of the loan. Instead, servicers’ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.

This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. It explains why the Home Affordable Modification Program (“HAMP”) has been unable to adequately address servicer incentive problems and suggests possible solutions, drawing on devices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.

Matt Festa

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

Avery & Brevoort on Lender Regulation and the Subprime Crisis

Robert B. Avery & Kenneth P. Brevoort (Federal Reserve) have posted The Subprime Crisis: How Much Did Lender Regulation Matter?  The abstract:

The recent subprime crisis has spawned a growing literature suggesting that regulatory preferences for lower-income borrowers and neighborhoods, embodied by the Community Reinvestment Act (CRA) and affordable housing goals for the Government Sponsored Enterprises, Fannie Mae and Freddie Mac (GSEs), may have caused or contributed to the crisis. For the most part, the empirical analyses presented in this literature have been based on associations between aggregated national trends. In this paper we examine more directly the links between these regulations and outcomes in the mortgage market, including measures of loan quality and delinquency rates. Our analysis has two components. The first component focuses mainly on the CRA. We argue that historical legacies create significant variations in the type of lenders that serve otherwise equal neighborhoods and that, because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the impact of the CRA. The second component of our analysis uses all lenders but takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations and which are not. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility. We argue that if the CRA or GSE goals had an impact, it should be clearest at this point. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA show less, not more, evidence of risky lending or ultimately higher mortgage delinquency rates. Similarly, the threshold tests show no evidence of a regulatory effect.

Matt Festa

December 23, 2010 in Community Economic Development, Federal Government, Financial Crisis, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 22, 2010

Banks struggling with glut of foreclosures

Most banks were not prepared to foreclose and own hundreds-of-thousands of properties. The housing bust required a range of mass-scale foreclosure and re-sale processes unfamiliar to these lenders and mistakes soon followed. National media reported on notary fraud and other irregularities in the foreclosure process.

Andrew Martin in the New York Times now reports a rise in bank break-ins.

In Texas, for example, Bank of America had the locks changed and the electricity shut off last year at Alan Schroit’s second home in Galveston, according to court papers. Mr. Schroit, who had paid off the house, had stored 75 pounds of salmon and halibut in his refrigerator and freezer, caught during a recent Alaskan fishing vacation. (emphasis added).

Lacking power, the freezer’s contents melted, spoiled and reeking melt water spread through the property and leaked through the flooring into joists and lower areas.

Of course, banks are not without excuse. Many mortgages allow lenders to enter a property in default and secure it, if deemed abandoned. From the apparent rise in unwarranted bank break-ins, however, it seems lenders expend little effort in determining whether such homes are truly abandoned.

In another case, a homeowner in default was still negotiating loan modification when the bank broke in and took everything:

Near Halloween 2008, work crews broke in and cleaned out the place, taking Persian rugs, china, furniture bought on a trip in Peru, skis, photos of her marriage and childhood in Iran. Her husband’s ashes were taken from the couple’s master bedroom.

Certainly a spike in volume of foreclosures accounts for the increase in such break-ins. But should volume excuse unwarranted break-ins?  It will be interesting to track the lawsuits brought against lenders in the following months. 

McKay Cunningham

December 22, 2010 in Caselaw, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property Rights | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 7, 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.

Matt Festa

December 7, 2010 in Finance, Housing, Mortgage Crisis, Mortgages, Property, Race, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, December 3, 2010

Furman Center's NYC Quarterly Housing Report

NYU's Furman Center for Real Estate and Urban Policy has published its New York City Quarterly Housing Update for 3d Quarter 2010.  A taste from the press release:

NYU’s Furman Center for Real Estate and Urban Policy released, for the first time, a quarterly update on six key indicators of housing market performance, based on a variety of administrative data sources.

The Furman Center found that while the volume of home sales declined by 14% from the second to third quarter of 2010, it remains higher than it was in the third quarter of 2009. Citywide, prices have stabilized, increasing slightly between the second and third quarters of 2010, and changing little since the same period last year. Prices in the third quarter of 2010 were 22% lower than they were at the peak of the market.

There's lots of great data and analysis in the full report.

Matt Festa

December 3, 2010 in Affordable Housing, Financial Crisis, Housing, Mortgage Crisis, Mortgages, New York, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

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.

Matt Festa

December 3, 2010 in Finance, Housing, Houston, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Monday, November 29, 2010

WSJ Number of the Week: 492

The Wall Street Journal's Economics Blog, in a post by Mark Whitehouse, has as its "number of the week" the number 492, as in the average of 492 Days from Default to Foreclosure.

The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.

Some may not be inclined to shed tears for the banks, who recently had to slow down their already-backlogged foreclosure process even more due to the revelations of robo-signing, but Whitehouse notes that this statistic could also provide a powerful incentive to other homeowners:

Millions of Americans still are paying their mortgages even though they owe more than their homes are worth. The more banks’ backlog grows, the more likely they are to join it, adding to the already giant pile of foreclosures weighing on the housing market.

Matt Festa

November 29, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (1) | TrackBack (0)

Tuesday, November 16, 2010

Johnson on En Masse Evictions Caused by Subprime Crisis

Creola Johnson has published Renters evicted en masse: collateral damage arising from the subprime foreclosure crisis in the Florida Law Review (62 Fla. L. Rev. 975 (2010), in case the Hein Online link doesn't work).

From the introduction:

Across the country, innocent renters are becoming victims of their landlords' inability to avoid foreclosure on their rental properties. Many are not receiving the legal rights that they are entitled to under federal and state law. For example, Marjorie Benedum and her husband Mel Harris came home from church in December 2009 to find a sheriff's notice on their door warning them to move out in ten days or be evicted from their Baltimore home. The notice came as a shock to Benedum and Harris as they had never failed to pay their rent on time. They learned their impending eviction was a result of a foreclosure on the property against their landlord. What the couple did not know when they found the notice of eviction is that they were entitled to stay in the property for ninety days under a new federal law. Luckily, this family learned their rights from a local attorney and did not have to immediately vacate their home, but not every family is so fortunate...

Many of the borrowers facing foreclosure are non-occupant owners. No doubt, some tried to be prudent investors who saw owning real estate as a long-term investment. Others were speculators or flippers-people who obtained adjustable rate loans to purchase homes for the sole purpose of reselling the homes at a profit within a year or two of purchase. However, when the housing bubble burst and economic conditions took a turn for the worse, many borrower-landlords became trapped with mortgage payments they could not afford and residential properties they could not sell.

The innocent victims of these borrower-landlords are consumers like the couple in Baltimore who simply had the misfortune of renting a house or apartment from a landlord unable to pay the mortgage. Despite having never defaulted on their rental payments to the landlord and the enactment of a new federal law giving tenants ninety days to vacate foreclosed properties, renters are being ordered to leave in as little as three days or face eviction. Some tenants are not even aware of the landlord's trouble until the sheriff's deputy arrives to evict them or until their utilities are turned off due to the landlord's failure to pay the utility bills. Scrambling to quickly come up with sufficient cash for moving expenses and a security deposit to get a new place to rent, some tenants then find themselves on the brink of homelessness.

This happened to some friends of ours here in Athens.  They had to scramble to find a new place to rent within a week, and they had to leave their huge, beautifully tended garden behind.   Fortunately they were able to find a new place in the same neighborhood quickly, but it was still a stressful and unfortunate situation.  I wish I'd know about this new federal law - perhaps it would have helped them. At least, maybe they would have been able to stay long enough to harvest their tomatoes!

Jamie Baker Roskie

November 16, 2010 in Housing, Mortgage Crisis, Scholarship | Permalink | Comments (0) | TrackBack (0)

Miller on the Strategic Default Debate Among Contract Scholars

Meredith R. Miller (Touro) has posted Strategic Default: The Popularization of a Debate Among Contract Scholars, forthcoming in the Cornell Real Estate Law Journal.  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

November 16, 2010 in Contracts, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

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)

Monday, October 11, 2010

Brown & Williams on Rethinking Adverse Possession

Carol Necole Brown (North Carolina) and Serena Maria Williams (Widener-Delaware) have posted Rethinking Adverse Possession: An Essay on Ownership and Possession, published in Syracuse Law Review, Vol. 60, No. 3, 2010   The abstract:

In the wake of the present real estate crisis, there has been prolonged discussion of the wrongdoing that led to systemic failures in the national real estate market. The mortgage crisis caught the nation’s attention because of its large scale and its rippling effect throughout the economy. Equally nefarious is the impact of adverse possession on the rights of individual property owners. While a single adverse possession does not affect the national market in the same way as the mortgage crisis did, to the individual owner, the wrongdoing, in the form of a trespass, that ripens into title, is just as devastating. We should reexamine, more broadly, concepts such as adverse possession that result in loss of ownership and move away from those whose foundation is in wrongdoing. The article begins with a brief discussion of foundational concepts inherent in the adverse possession doctrine. It then analyzes four examples that demonstrate the impact of adverse possession: 1) the purchaser and the bona fide donee; 2) the co-owners; 3) the squatters; and 4) the erroneous deed. The article concludes by summarizing the policies that justify abrogating the adverse possession doctrine.

Matt Festa

October 11, 2010 in Mortgage Crisis, Property Rights, Property Theory, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Sunday, October 10, 2010

Peterson on Demystifying MERS' Land Title Theory

Christopher Lewis Peterson (Utah) has posted Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, forthcoming in the Real Property, Probate, & Trust Law Journal.  The abstract:

Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system. This Article concludes with a discussion of steps needed to rebuild trustworthy real property ownership records.

Matt Festa

October 10, 2010 in Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Thursday, September 30, 2010

Lucy's UVa Report on a Different Path to a Housing Rebound

William Lucy (Virginia--urban & environmental planning) has authored a report titled A Different Path to a Housing Rebound.  From the UVa press release:

September 24, 2010 — Changing demographics are the main cause of today's housing surplus, according to new research by a University of Virginia urban and environmental planning professor. The path to a housing market rebound doesn't lie in new construction, William Lucy found, but in rethinking housing needs based on changing demographics.

Lucy based his report on a review of U.S. Census Bureau data, U.S. Housing Market Conditions: Historical Data, U.S. Department of Housing and Urban Development reports, Joint Center for Housing Studies and research by the Urban Land Institute and other scholars.

"Surplus housing is not caused by either excessive new construction or by foreclosure," Lucy said, noting that only 20 percent of housing units for sale or sold in 2009-10 were new houses and foreclosures. 

The press release webpage includes a short, informative YouTube interview with Prof. Lucy.  There is also a link to the report and to his supporting data tables.  He concludes that the future of the housing market is in recognizing the demand for housing options based on location and demographics.  

More decentralized, multidimensional and shared solutions by developers, builders and government are required, and opportunities for fix-up, remodeling, expansion and condominium projects in cities and inner suburbs, fueled by preferences for convenient locations, will be the economic driver in the housing market in the future, Lucy predicts.

"Revival of housing may be slower than many wish, and it will not be a full early partner in moving employment toward its previous peak," Lucy said. "It is time to move on to a richer, more varied and enhanced quality of life with the convenience and energy efficiency that denser settlements can provide."

Matt Festa

September 30, 2010 in Housing, Mortgage Crisis, Real Estate Transactions, Scholarship, Suburbs, Urbanism | Permalink | Comments (0) | TrackBack (0)

Saturday, September 25, 2010

Kotkin: Why Housing Will Come Back

On his New Geography blog for Forbes, Joel Kotkin has an essay on why he thinks there will be a resurgence in the housing market starting later this decade: Why Housing Will Come Back.  He begins with a historical observation:

Few icons of the American way of life have suffered more in recent years than  homeownership. Since the bursting of the housing bubble, there has been a steady drumbeat from the factories of futurist punditry that the notion of owning a home will, and, more importantly, should become out of reach for most Americans.

Before jumping on this bandwagon, perhaps we would do well to understand the role that homeownership and the diffusion of property plays in a democracy. From Madison and Jefferson through Lincoln’s Homestead Act, the most enduring and radical notion of American political economy has been the diffusion of property.

Kotkin then notes that in recent years, and especially in light of the mortgage crisis, the single-family homeownership ideal has been criticized from both the right (government overpromotion) and the left (sprawl, new urbanism, environmentalism).  His response:

Yet for all the problems facing the housing market, homeownership–not exclusively single-family houses–is not likely to fade dramatically for the foreseeable future. The most compelling reason has to do with continued public preference for single-family homes, suburbs and the notion of owning a “piece” of the American dream.   This is why that four out of every five homes built in America over the past few decades, notes urban historian Witold Rybczynski, have less to do with government policy than “with buyers’ preferences, that is, What People Want.

Kotkin goes on to explain several reasons why he believes housing will come back, after adjusting to the market correction imposed by the economic recession.  Why I find most interesting is that his prediction is based less on economics or law than on demographics:

As boomers age, the two big groups that will drive housing will be the young Millenial generation born after 1983 as well as immigrants and their offspring. Sixty million strong, the millenials are just now entering their late 20s. They are just beginning to start hunting for houses and places to establish roots. Generational chroniclers  Morley Winograd and Mike Hais, describe millenials in their surveys as family-oriented young people who value homeownership even more than their boomer parents. They also are somewhat more likely to choose suburbia as their “ideal place to live” than the previous generation.

These tendencies are even more marked among immigrants and their children. Already a majority of immigrants live in suburbia, up from 40% in the 1970s. They are attracted in many cases by both jobs and the opportunity to buy a single-family home. For an immigrant from Mumbai, Hong Kong or Mexico City, the “American dream” is rarely living in high density surrounded by concret

An interesting take.  For more writings on urban theory from the center-right perspective (e.g., Why we Have to Learn to Love the Subdivision--Again) see Kotkin's New Geography website. 

Matt Festa

September 25, 2010 in Density, Development, Environmentalism, Housing, Mortgage Crisis, New Urbanism, Planning, Real Estate Transactions, Sprawl, Suburbs, Urbanism | 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)