Friday, January 25, 2008

Advice to Law Journals: Part 22

Haven't posted anything on law reviews of late (partly because I've been distracted by talk of a lawsuit based on nuisance by Cleveland against subprime lenders).  Congratulations, by the way, to Ben Barros for predicting this back in fall of 2005.  I wish more people had listened to you, Ben.  Perhaps it's time to put up some more advice.  This piece is aimed at faculty: 

22  give the students some autonomy.  This is their journal, after all--so let the students have the final say in how to run the journal.

Alfred L. Brophy
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January 25, 2008 in Law Schools | Permalink | Comments (0) | TrackBack (0)

Thursday, January 24, 2008

More Subprime Litigation Issues

The litigation fall out from the subprime mess is going to be a big topic for property profs.  (Longtime readers might remember that I predicted a part of the mess back in the fall of 2005).  Dave Redden has an interesting post on the subject that highlights some interesting issues regarding underwriting incentives and fabrication of truth-in-lending documentation:

Several volunteers in the Twin Cities area have gathered together to provide legal services to homeowners facing foreclosure. I sat in on their meeting yesterday, which was very instructive, but I heard something that struck me funny. Sometimes clients insist they haven't received a particular letter or form but the attorney is stuck in a situation where there's no real proof. I previously worked for an insurance company owned by a major mortgage lender involved in sub-prime lending and I propose that proving documentation is fabricated may be less difficult than attorneys thinks. I also bet that mistakes like this are going to be widespread such that successful TILA challenges will be fairly common if mortgage documents are given the proper consideration.

That mortgage lenders are fabricating documentation is beyond dispute. Sometimes a watchful eye will catch a tell-tale sign on the letter itself, but most times there doesn't appear to be a way to tell. There is. Most of the major lenders are probably on "paperless" electronic systems where all the documentation is maintained digitally. When documents are stored this way there are two types of information stored: the document itself with all the information on it, and a body of information about the electronic file - metadata. This metadata has information like when the last change was made to the file and, more importantly, when the document was created, or at least imaged into the system. When attorneys request documentation either before or after discovery, they should request metadata on each document, including but not limited to when each document was generated or added to the system, clearly indicating to which document the metadata is referring.

A feature of most digital document management systems is the ability to "annotate" on the digital document - to mark it up and make notes on it like you would with a pen on paper. When the documents are printed to paper during discovery they can be printed with or without annotations. In addition to a clean, non-annotated copy of all documentation, attorneys should request that the mortgage lender print a separate copy of all documents containing such annotation or maybe "all digital notations contained and/or maintained as part of or in connection with the digitally stored subject document."

Lastly, let me tell you why I think TILA violations will be more widespread than you might expect. When I worked in part of this major mortgage lender I sat near the "closing unit." This is the last step in the mortgage process - the broker or loan officer has solicited the loan application, it's made it through document verification and underwriting. The closing unit reviews all the final documentation to make sure everything looks in line then cuts the checks. At this lender it's a pretty young crowd, with lots of people in their early 20's. Many of them are part-time employees. Now that alone doesn't make for an error-prone department, but when you take a minute to examine their incentives you'll understand why I think they are.

Every day I worked next to them I saw they were provided with high-sugar, high-caffeine drinks and snacks. They had all types of soda (tons of Mountain Dew), chips, and such. At lunch time they'd always have pizza, Olive Garden, Mexican food - you name it - brought in and not the cheap stuff either. Real food from sit-down restaurants where you leave tips. It became particularly gluttonous around the end of the month. I asked about it once and was told that most of the restaurant food is provided by loan officers. A lot of times it was a branch office that got together and chipped in to provide lunch to the closers to "show their appreciation." They probably also did it to encourage the closing department to get the loans buttoned up before the end of the month so the loan officers would get their commission on their next paycheck.

Volume was the big driver - they wanted to fund $x,xxx,xxx,xxx of loans that month, beating last month's record. If they did, there would be a tremendous celebration. The department was moved to Arizona from California, because in California you have to pay OT if they work more than 8 hours in a day. In Arizona your employees can work more than 8 hours a day and earn no OT unless they work more than 40 hours in the week. This way they could really stack up the manpower toward the end of the month when they were pushing to meet or beat their goals.

Given the volume they were producing, the people the were using to produce it, and the incentives they had in place, it's hard to imagine that there wasn't a whole lot of stuff slipping by. I don't doubt that the underwriters were subject to similar pressures. I also don't doubt that these were the same sorts of things going on at other banks. In the mortgage business, when it's boom time you have to push people to produce but still encourage a transitory workforce because some day the boom will end. No matter how much lip-service managers pay to it, quality will always take a back seat in these situations, at least to the extent that it doesn't effect the bottom line too much.

Ben Barros

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January 24, 2008 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 22, 2008

Buyer Sues Broker for Failure to Disclose Declining Market

From a NY Times article; particularly notable for the impact of the recent shift to buyer's agents:

Marty Ummel believes she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

What makes Ummel different is that she is suing her agent, saying it was all his fault.

Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

"When your house appreciates $100,000 in the first six months, you're not quite as concerned that maybe the valuation was $25,000 or $50,000 off," said Clifford Horner of the law firm Horner & Singer. "But when your house goes down, you ask: 'Who might have led me astray here?'"

Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller. The long boom that began in the late 1990s put an end to that one-sided world. As prices spiked, buyer's agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases.

That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests. The Ummel case poses the question: In a relationship built on trust, where promises are rarely written down and where -- as in this case -- there is no signed contract, what are the exact obligations of these representatives in guiding their clients through a sizzling market?

"Agents have a lot of fiduciary duties, but they don't make money unless they close the sale," said Joel Ruben, a real estate lawyer in Manhattan Beach, Calif. "In an inflated market, there are built-in temptations to cut corners."

Ben Barros

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January 22, 2008 in Real Estate Transactions, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Kent on Regulatory Takings

Michael B. Kent, Jr. (John Marshall - Atlanta) has posted Construing the Canon: An Exegesis of Regulatory Takings Jurisprudence after Lingle v. Chevron on SSRN. Here's the abstract:

Regulatory takings has long been considered one of the more confused areas of constitutional analysis. Since the Supreme Court's opinion in Penn Central Transportation Company v. City of New York, the law of regulatory takings has been characterized by varying analytical tests, competing theories, seemingly results-oriented decision-making, and a conflation with the law of substantive due process. In 2005, however, the Court made substantial strides in bringing some clarity to this area with its decision in Lingle v. Chevron U.S.A., Inc. In that case, the Court unanimously rejected the substantially advances test, demonstrating a rare willingness to discard prior precedent as well as to divorce takings law from that of due process. Moreover, the Court unanimously reaffirmed five other decisions (Penn Central, Loretto, Nolan, Lucas, and Dolan) that now govern the regulatory takings inquiry.

This article argues that these five decisions, along with Lingle itself, should be considered uniquely authoritative (akin to a canon of sacred writings) with regard to takings analysis. By reading this canon exegetically - that is, by divining the intent of the Court through the language and context of the decisions viewed as if they were components of a single, unified text - it is possible to perceive a way out of the takings muddle. Viewing the cases in this manner, the canon presents a clearer picture of the overarching themes and characteristics of regulatory takings, as well as a greater coherence in the frameworks under which takings claims should be analyzed. This article seeks to elucidate those themes and characteristics, explain the analytical frameworks, and raise issues that continue to require the Court's attention.

Ben Barros

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January 22, 2008 in Recent Scholarship, Takings | Permalink | Comments (0) | TrackBack (0)

Monday, January 21, 2008

Body Parts Futures?

From an op-ed by Ian Williams in the Guardian:

In the US, the alleged bastion of property rights, religious obscurantism is robbing American citizens of their birthright. Everyone, no matter how poor, is wandering around with some quarter of a million dollars worth of transplant material: but because of the 1984 National Organ Transplantation Act, they cannot cash in their chips.

The surgeons and hospitals of America can charge an arm and a leg for hoisting out hearts and replanting them, and it seems some morticians can eke out their bottom line on the side, but the donors have no financial incentive whatsoever. Talk about a "death tax!" This no mere Republican rhetorical trope - it's the real thing. The federal government, almost unchallenged, has deprived us of the usufruct of our most personal property.

Adam Smith's invisible hand is just waiting to be transplanted into this field. Of course you may object that it is difficult for a cadaver to take profits from such a sale, but think futures. If bankers can sell stinkers like collateralised debt obligations, they should easily be able to devise an actuarially advised organ options market which would make a return for the living, and help a return to life for those in need of the spare parts.

The principle is the same as the viaticals market in which for example, HIV sufferers were able to cash in their life insurance early so they could enjoy the proceeds while still alive.

The people who would rush to sell organ futures would very likely also be those who are least likely to have a private pension scheme and who would benefit most from topping up their social security funds.

If the government really must get involved, it could help solve the alleged social security crisis by insisting that at least some, if not all, of the proceeds, would be invested in some sort of individual retirement account, but a cash handout would also help boost the recession-verging economy by putting money into the hands of people who would rush out and spend it.

Ben Barros

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January 21, 2008 in Property Theory | Permalink | Comments (0) | TrackBack (0)

Atuahene on Reparation, Restoration, and Property in South Africa

Bernadette Atuahene (Chicago-Kent) has posted the final version of From Reparation to Restoration: Moving Beyond Restoring Property Rights to Restoring Political and Economic Visibility on SSRN.  Here's the abstract:

How does a democratic state legitimize strong property rights when property arrangements are widely perceived to be defined by past theft? The answer, I argue, is through restorative justice measures that redistribute wealth based on past dispossession. This answer, however, leads to two more complex questions: Who gets priority in the restorative process given limited resources and how should the process unfold? The concise answers to these two ancillary questions are:

First, instances of what I call property-induced invisibility should be prioritized as a baseline for achieving legitimacy. When property is confiscated in this manner people are removed from the social contract and made invisible. Widespread invisibility is of particular concern because it can lead to chaos and instability and places the legitimacy of existing property arrangements in serious doubt. Consequently, states must, at minimum, rectify property-induced invisibility in the restorative process.

Second, societies must change the focus from restoration of the physical property confiscated to the larger project of restoring an individual's relationship to society. This will happen if those subject to property-induced invisibility are included in the social contract through a bottom-up process that provides the dispossessed with asset-based choices. The process of allowing people to choose how they are made whole will do a substantial amount of work towards correcting property-induced invisibility and thereby increasing the legitimacy of existing property arrangements.

I use a South African case study to test the practical effect of my theories of invisibility and restoration.

Here's a lengthier description:

In this article I explore two important questions facing countries that decide to give communities and individuals compensation for property stolen in the past:  Who at minimum should be restored; and how should the restorative process transpire?

As to the first question, I argue that, at minimum, the state has a moral obligation to compensate people who have been subjected to severe dehumanization as a result of an uncompensated property confiscation.  My claim is that this confiscation of property results in property-induced invisibility—that is, people are removed from the social contract and made invisible. Instances of property-induced invisibility can be seen throughout history among native peoples whose land was stolen through conquest.  Also, Tutsi and moderate Hutu subjected to property confiscation during the Rwandan genocide, and non-whites dispossessed during the Apartheid government’s incessant campaign of dehumanization would be modern-day examples of victims of property-induced invisibility.   

As to the second question, I argue that societies must redirect their focus from the limited concept of reparations (where the goal is securing compensation for past wrongs but the state does not allow the dispossessed to choose how they are compensated) to restoration.  Restoration is the larger project of restoring a dispossessed group or individual’s relationship to society, including them in the social contract and thereby reversing the condition and effects of property-induced invisibility.  This is accomplished through a bottom-up process that provides asset-based choices, which both allow people to choose how they are made whole and give them viable options from which to choose.  The options can include the return of their property (if possible), alternative property, monetary compensation, free higher education for two generations, priority in an already established housing process, or highly subsidized access to credit, for example.

Finally, I evaluate South Africa’s Land Restitution Program (LRP) to test the theoretical concepts of property-induced invisibility and restoration that I construct.  More specifically, I investigate whether, as a baseline, South Africans subject to property-induced invisibility benefit from the LRP.  In addition, I analyze how the government can transform the LRP from a reparations program to a restoration program.

This article is Part I of a three-part trilogy.  Part II will explore how a state can avoid instability when past property theft causes a significant number of people to believe that the present property distribution is illegitimate.  Part III will examine how far back a state should look in devising a compensation program when there have been multiple layers of property dispossession.

This is a really interesting article.  As Solum says, download it while it's hot!

Ben Barros

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January 21, 2008 | Permalink | Comments (1) | TrackBack (0)