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Monday, February 13, 2012

Does the Dukeminier & Krier Get the Mortgage Crisis Wrong?

The following is a guest post from Rebecca Tushnet of Georgetown.  Check out her impressive scholarly contributions here. Also, if you're interested in false advertising and other IP issues, then you really should follow her blog.  Without further ado:

I recently started teaching the subprime mortgage crisis in my first-year Property class. We use Dukeminier et al., though I’ve supplemented with a bunch of other material, in part because the book came out in 2010.  When I was preparing the syllabus, I’d planned to teach McGlawn v. Pennsylvania Human Relations Commission, 891 A.2d 757 (Commonwealth Ct. Penn. 2006), which I found out about in the excellent book Integrating Spaces: Property Law and Race. But then I saw that the most recent edition of the Dukeminier casebook had added a new section on subprime mortgages that contained Commonwealth v. Fremont, on which McGlawn relies for principles about what subprime loans were unfair, so—busy and trusting—I put Fremont on the syllabus instead.

Here’s the thing: McGlawn introduces students to a number of actual victims of predatory lending, including the financial and emotional losses they suffered, while Fremont simply recites the predatory features of the loans, making it harder to see why we should care.  Then, in the questions following the case, the Dukeminier casebook asks why consumers took these terrible loans.  It cites some law & economics scholarship and some behavioral economics, suggesting that the problem was excessive consumer optimism (as opposed to, in McGlawn, a fair amount of pure fraud as well as misunderstanding). 

What the casebook doesn’t ask is why lenders made these terrible loans.  The questions we ask influence the answers we get.  It’s also notable that the casebook only asks about the consumers in a paragraph that suggests (contrary to all credible evidence) that the Community Reinvestment Act had some causative relationship to the subprime crisis.

The casebook additionally says in the same paragraph, “Because a large proportion of home mortgage loans are sold into the secondary mortgage market, most equitable defenses are unavailable to homeowners as a result of the holder-in-due-course doctrine.”  Most students won’t really know what that means; I’ve found that they are disturbed enough by the concept of void versus voidable title—which shows up earlier in the course in the O’Keefe v. Snyder case.  But it may be worth telling students that this statement—the foundation of securitization of mortgage loans—is not as certain as the casebook presents it.  Among other things, if the note and mortgage were actually assigned in order to perform the foreclosure after the loan went into default (which wasn’t supposed to be the sequence but apparently often was), it’s not clear why the holder is a holder in due course with no notice of the problem with the underlying debt.

I don’t think Dukeminier et al. is an evil casebook, nor do I think that the authors consciously chose to strip out the homeowner-victims in order to reduce them to people who made bad bets and must inevitably suffer the consequences. (And many of the chain of title problems were just coming to light in 2010, which explains why they aren’t in the casebook.)  But case selection and questions asked of students have powerful effects on what new lawyers think of as the baseline of the law, and this new section in the casebook is a good example.

Rebecca Tushnet

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Heck yes, it does.

I supplement it extensively for the significant time we devote to the crisis. It does cast blame on the CRA for the crisis, contrary to all evidence.

I recommend the Ibanez case from Massachusetts an excellent, student-friendly primer on the structure of the securitization industry and chain of title problems. I recommend non-case readings for better analysis of the crisis.

Posted by: Mark A. Edwards | Feb 13, 2012 10:47:26 AM

Mark, I also use Ibanez, as well as an article by John Carney, Why It Could Be Very Hard for Banks to Avoid Ibanez Mortgage Catastrophes; a Florida sanctions hearing with a young lawyer that shows my students that young attorneys can face tough choices; excerpts from two of Christopher Peterson's articles; excerpts from a report on Legislative Responses to the Foreclosure Crisis in Nonjudicial States; and, just for fun, a McSweeney’s article: It is possible that I overkill it, but I get mad. What are you using?

Posted by: Rebecca Tushnet | Feb 14, 2012 8:53:39 PM

Then, in the questions following the case, the Dukeminier casebook asks why consumers took these terrible loans.

Posted by: Tom Henry | Jun 25, 2012 12:13:00 AM

There are several sides in the sub-prime mortgage meltdown. Banks, lenders, consumers, Wall Street, Presidents. Economists and the Federal Reserve all played a part in the meltdown of the economy, mortgage market and real estate market. I think it is hardly fair to eradicate consumers from any type of blame. It is easy to see banks and consumers as the story of David vs. Goliath. One choosing to root for the smaller underdog, but this is simply not the case and one must understand the complete story and represent both sides fairly.
There are truths that banks made bad lending decisions and so did consumers. Neither party expected the number of defaults or future plummeting home prices. In fact, most lenders were changing their guidelines based on previous portfolio performances over the subsequent earning quarters or years. Few defaults and recoverable losses from defaults influenced lenders in continuing the ease of lending guidelines quarter after quarter. It is true that some lenders became greedy and offered negative amortization loans with huge incentives to brokers and correspondent lenders as Wall Street purchased these securities and relieved liability from the originators. But World Savings had been offering similar loans for more than a decade with favorable returns and moderate losses.
Consumers played their own role both knowingly and unknowingly. Many consumers were betting on continuous appreciation, a future stable economy, were influenced by greed or felt that they need enter the home ownership club along with the Joneses among other reasons. Consumers were privy to doing their own research regarding affordability, real estate cycles, current economic cycles etc.
The truth is the signs should have been there for both parties. Signs were evident if one researched the appropriate information IE home prices vs. income, past economic and social cycles, and many other apparent signs. Everyone should be held liable for their actions in this fiasco.
The largest portion of blame however was not addressed. That is the government’s share, specifically the Federal Reserve Chairman Alan Greenspan and President Bush. What was driving prices so high, who was making credit so easily obtainable to banks and consumers and why did we need to do this? America would have suffered a recession during the war efforts of President Bush if it were not for Alan Greenspan’s attempts to help maintain and inflate the GDP. Trillions were spent on an unnecessary war, men and women plucked from domestic careers and spending would have declined. Could America look weak during not one but two wars in Iraq and Afghanistan? NO. So what does the country do to create the image of a thriving economy? Alan Greenspan helped build that image by decreasing interest rates to historical lows, allowing banks, lenders, businesses, consumers, etc to borrow excess money at rates not seen in nearly 40 years. Housing prices skyrocketed based on record interest rates, consumers were purchasing homes like hot cakes; supply was running low and demand high. Credit cards, car loans, personal loans, business loans and consumer loans were abundant and everyone could purchase everything on credit, and they did. The amount of debt for the average business and consumer increased and the amount of savings decreased.
The Chairman of the Federal Reserve had to foresee that these economic conditions needed to be managed and that if they continued too long that the over-inflation would lead to inevitable over and corrective deflation. An educated man such as Greenspan must have known Newton’s law “To every action there is always an equal and opposite reaction.”
Interest rates needed to be adjusted early and moderately before things got out of control. Why did this not take place? Because we were still at war? Because we went too far already? Because President Bush insisted on a thriving economy and a strong country image?
These are the two men that need be first and most notably questioned and addressed when discussing the topic of the sub-prime mortgage melt-down, the housing crisis and the current state of the economy. Consumers and banks can share blame, participation and claims of victim after we first address the head of the dragon.

Posted by: Brent Chambers | Aug 18, 2012 3:51:39 PM

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