Tuesday, September 13, 2016
In the past several years the growth of virtual property in today’s economy has been explosive. The everyday use of virtual assets ranging from Twitter and Facebook to YouTube and virtual world accounts is nearly absolute. Indeed, by one account Americans check social media over 17 times per day. Further, a growing number of savvy virtual entrepreneurs are reporting incomes in the six and seven figure range, derived solely from their online businesses. Nevertheless, although the commercial world has come to embrace these newfound markets, commercial law has done a poor job of keeping up. Scholars have argued that laws governing everything from taxation, to bankruptcy, to privacy rights have not kept pace with our ever-changing virtual world. And nowhere is this truer than in the law of secured credit. Doubtlessly virtual property has come to represent significant wealth and importance, yet its value as a source of leveraged capital remains, in large part, untapped. This unrealized potential is not without good reason; the law — specifically Article 9 of the UCC and the law of property more broadly — suffers from a number of deficiencies and anomalies that make the use of virtual property in secured credit transactions not only overly complex and expensive, but almost entirely untenable. This Article shines light on these shortcomings, and, in doing so, advances a number of guiding principles and specific legislative recommendations, all geared toward a reformation of the law of secured credit in virtual property.
Friday, July 1, 2016
When a city undertakes a development project, low income and homeless persons face risks of expulsion. Public and private developers often target low-income neighborhoods and public lands because those spaces are viewed as economically more attainable or available for development. Moreover, the legal system's preference to treat disputes as individual entitlement claims tends to relegate disputes to broad questions of entitlements rather than unpacking the impacts that property changes have on the vulnerable populations. Whether by gentrification or by enhancement of city infrastructure, developer decisions disrupt what are already unstable living environments by imposing increased costs of relocation. These changes also destabilize community relationships by separating individuals and families from their support networks, local transportation options, and local employment that they have come to rely on. In short, low-income and homeless persons find themselves even more destabilized when public and private development projects force their evacuation from where they live. This article argues that though development may be necessary, it should not be undertaken without more serious evaluation of the human impacts in relation to the space. Such evaluations should include the impact on communities, employment, education, and environment for impacted persons. Importantly, failure to take notice of these impacts continues to promote cycles of poverty that plague American cities.
Drawing on similarities in the environmental context, the article argues that a NEPA-like approach to human housing can offset externalities that homeless persons and those living in low-income housing are forced to internalize through environment changes. Amongst those impacts are the imbalance between the well-funded developer and low income populations; the view that low income properties can be classified as nuisance-type properties; and the tendency to only consider the highest best use of property as the rationale for development. The article concludes by offering model legislation that could be implemented to provide a NEPA like assessment to city development.
And here's his TED Talk. Good job, Marc!
Wednesday, June 15, 2016
Richard Cupp (Pepperdine) has posted Animals as More Than "Mere Things," but Still Property: A Call for Continuing Evolution of the Animal Welfare Paradigm (University of Cincinnati Law Review) on SSRN. Here's the abstract:
Survival of the animal welfare paradigm (as contrasted with a rights-based paradigm creating legal standing for at least some animals) depends on keeping pace with appropriate societal evolution favoring stronger protections for animals. Although evolution of animal welfare protection will take many forms, this Article specifically addresses models for evolving conceptualizations of animals’ property status within the context of animal welfare. For example, in 2015 France amended its Civil Code to change its description of companion animals and some other animals from movable property to “living beings gifted with sensitivity,” while maintaining their status as property. This Article will evaluate various possible approaches courts and legislatures might adopt to highlight the distinctiveness of animals’ property status as compared to inanimate property. Although risks are inherent, finding thoughtful ways to improve or elaborate on some of our courts’ and legislatures’ animals-as-property characterizations may encourage more appropriate protections where needed under the welfare paradigm, and may help blunt arguments that animals are “mere things” under the welfare paradigm. Animals capable of pain or distress are significantly different than ordinary personal property, and more vigorously emphasizing their distinctiveness as a subset of personal property would further both animal welfare and human interests.
Tuesday, June 7, 2016
I’ve been thinking a lot lately about the property law aspects of debt (don’t let your head hit the keyboard as you fall into a deep slumber from reading that, now!). Most of my interest in this topic comes from my obsession with the Puerto Rican debt crisis. Unless you’ve shut yourself off from social media (or any media, for that matter) you likely at least know that the island, a U.S. territory serving as home to 3.5 million American citizens, is flat broke. They’ve defaulted on multiple interest payments to their bondholders, tried to enact their own bankruptcy-like law (overview by Stephen Lubben at Senton Hall here)--currently pending a decision from SCOTUS, and right now Congress is trying to pass a super special insolvency procedure to help out the island (for a little Citizens United flavor, take a look at this dark money ad urging the defeat of the bill). I’ll have a post on this topic, and the takings claims posed by the bondholders, next week.
But back to debt as property . . . The Supreme Court has long held that rights in debt (contract rights) constitute property. See Omnia Commercial Co. v. U.S., 261 U.S. 502 (1923); see also Lynch v. United States, 292 U.S. 571, 579 (1934) (“Valid contracts are property.”). And we freely buy, sell, and trade such rights all the time. Indeed, that’s what the secondary mortgage market and the private label mortgage market are all about! Buying and selling mortgage debt at discounted rates, typically (in the Fannie/Freddie context) to provide more liquidity to the residential housing market and thereby increasing the availability of credit.
But people buy debt for other reasons as well—to make money! There was a great (and, per usual, hilarious) discussion on John Oliver’s HBO show, Last Week Tonight, this past Sunday on the topic of “Debt Buyers.” Here’s the video:
In the show he points out a bunch of things about the debt buying industry—prominently discussing the shady practices of some of the industry’s less than wholesome characters. In fact, he sends a team with a hidden camera to the industry’s trade conference in Las Vegas. One of the panel presenters at the conference notes cavalierly that, despite state law requirements that debt buyers disclose to consumers that their obligation to pay the debt may be extinguished by the statute of limitations: “Who’s going to read and understand the words on this letter? The unsophisticated consumer? . . . I depose these plaintiffs in these lawsuits and they don’t even read the letter.” What a jerk! I bet he wasn’t too happy to see his remarks go viral.
But back to the point . . . the general idea of the show was to basically talk about how bad the debt buying business can be: how bad guys go after poor, unsuspecting consumer debtors and ruin their lives. But it strikes me that the issue of how one gets into debt and the ability of someone other than the original creditor to enforce the credit right are entirely different. Putting aside the former, is there anything wrong with selling debt like we sell tangible personal and real property? From a debtor’s perspective, does it really matter whether the original counterparty to the contract is the party now trying to enforce it? We could assume that there might be something particular about that specific obligee that makes contracting with him, from the obligor's perspective, special. In those cases we have doctrines of assignability. But, in the context of pure debt (the right to collect on an amount owed) in an arms-length transaction, it does not seem much different than a market for anything else.
But are there policy reasons why we should prohibit (or at least discourage) this type of market from becoming more robust (if it isn’t already – spoiler: it is already)? Chain of title problems certainly loom large in these transactions. As the segment above indicates, often all that is exchanged between the debt seller and debt buyer is the purchase price and an Excel spreadsheet with minimal information about the obligations owed. There’s also little due diligence done on the buyer’s end – such as ascertaining whether the debt is even still collectable. Perhaps one could argue that the nature of this particular type of “property” (specifically how it can impact vulnerable consumer debtors when owned by unscrupulous collectors) merits thinking differently about whether the debt buying business is just another property market. Maybe there are just too many bad guys or, if there aren't that many, the damage that the few cause is just too great.
My home state of Louisiana has a really interesting way of dealing with debt sales once litigation on the debt has commenced. We call it the “right of litigious redemption.” It basically works like this: Original Creditor commences a lawsuit against Debtor. As the litigation proceeds, Original Creditor realizes that he cannot (or does not want to) carry the lawsuit through to the end because it is too time consuming or is eating up too many resources (or for whatever reason). Instead, Original Creditor “sells” the lawsuit to Buying Creditor for a discounted purchase price. Now, Buying Creditor is the plaintiff against Debtor in the litigation. Under Louisiana law, Debtor can now pay to Buying Creditor an amount equal to the discounted purchase price he paid Original Creditor, and in doing so completely extinguish the lawsuit! Voila! Just like that. You can see how this is a great deal for Debtor. If the debt he owes to Original Creditor is $20,000, but Buying Creditor only paid Original Creditor $7,000 for it, then Debtor is essentially relieved of paying $13,000 worth of debt! The supposed policy reason for doing this has to do with wanting to discourage a robust market for the buying and selling of lawsuits from developing. To my knowledge, no other state in the U.S. has such a law (please correct me if I’m wrong in the comments below).
So what about property markets in debt? Good? Bad? Or . . . like most things, a little bit of both?
Monday, May 16, 2016
(Photo Credit: Rawstory.com)
The good people over at the Homeless Rights Advocacy Project (housed at the Seattle University School of Law) recently produced a series of briefs on various legal and policy issues relating to homelessness. These reports will certainly be of interest to those teaching property (particularly with an emphasis on social policy and housing). Click here to access the briefs. Cribbing from the Project's release page:
The new reports examine the impacts of increasingly popular laws and policies that criminalize homelessness, such as prohibitions on living in vehicles, sweeps of tent encampments, pet ownership standards, and barriers to access at emergency shelters.
"Our research in 2015 started an important conversation, both locally and nationally, about treating people with compassion and fairness under the law," said Professor Sara Rankin, HRAP's faculty director. "These new reports take that conversation to the next level."
HRAP students conducted extensive legal research and analysis to complete the briefs, conducting interviews with a wide range of experts (including people experiencing homelessness); surveying municipal, state, and federal laws; and reviewing legal standards set by previous court decisions.
"We found that common homelessness myths are refuted by statistics, experience, case law, and common sense," said Justin Olson, a third-year law student. "These are the issues that people experiencing homelessness struggle with every day."
"The reaction by many cities to visible poverty has been to try to make it invisible using methods like homeless encampment sweeps," said Samir Junejo, also a third-year law student. "However, it's clear that we cannot sweep the problem of homelessness under a rug and hope it goes away."
Prejudice and unconstitutional discrimination against the visibly poor continues, Professor Rankin said. The new reports identify specific common problems and offer effective, legally sound alternatives.
Key findings of the 2016 reports:
- Nearly one-third of Washington cities surveyed ban people from living in their vehicles, even temporarily. Seattle has the highest number of ordinances against vehicle residency (20). Ordinances in Tacoma, Aberdeen, and Longview likely violate the U.S. Constitution.
- Business improvement districts can function as quasi-governmental agencies, regulating public space in ways that can unfairly target the visibly poor. The Metropolitan Improvement District in Seattle, for example, conducted 22,843 trespass and wake-up visits from 2014-15, a rate of roughly 62 interactions per day.
- The assumption that people experiencing homelessness can simply go to an emergency shelter is deeply flawed. Barriers to shelter access include lack of capacity, lack of accommodations for families, rules against unaccompanied youth, unsanitary or unsafe conditions, and sobriety requirements.
- "Sweeps" of homeless encampments are ineffective, traumatizing to residents, and potentially unconstitutional.
- Pets contribute to the emotional well-being of people experiencing homelessness, but pet owners face constant attention, harassment, and scrutiny by both passersby and law enforcement officers. Licensing requirements, anti-tethering laws, and standards of care laws unfairly target the visibly poor.
- Immigrants and refugees are particularly vulnerable to homelessness. Factors include economic challenges, language barriers, education barriers, housing instability, and legal status.
(Hat tip: Sara Rankin)
Monday, May 9, 2016
Professors’ Corner's FREE monthly webinar featuring a panel of law professors, addressing topics of interest to practitioners of real estate and trusts/estates.
Sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group
Tuesday, May 10, 2016
12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific
A Lawyer’s Guide to the Law of Public Art
Tyler T. Ochoa, Professor of Law, High Tech Law Institute, Santa Clara University School of Law
Anthony L. François, Senior Staff Attorney, Pacific Legal Foundation, Sacramento, CA
Moderator: Christopher K. Odinet, Assistant Professor of Law, Southern University Law Center
The use of art in public spaces has captivated the minds of federal, state, and local policymakers in recent years, with some cities even requiring that private developers include public art in all new projects. Moreover, ownership of public art has drawn the attention of lawyers and advocates, particularly when it comes to competing property and management rights between the public, the artist, landowners, and interested third parties. This program begins with an overview of the intellectual property rights in connection with public art, explaining the differences between the rights in the intangible work and the rights in the physical object itself. The program continues with a case study of the City of Oakland's art requirement for private real estate developers, exploring the property and related legal issues that surround such regimes.
Register for this FREE webinar by clicking here.
Monday, May 2, 2016
Wei Wen (University of New England) has posted How American Common Law Doctrines May Inform Mainland China to Achieve Certainty in Land Sale Contracts (Asian-Pacific Law & Policy) on SSRN. Here's the abstract:
This paper explores one of the most significant problems confronting Mainland China in relation to contract and property law today, which is, whether or not written form is mandatory for land sale contracts. In practice, Chinese courts have delivered contradictory cases in relation to contractual form. Some courts regard the written form as being mandatory and therefore no contractual remedies are available to enforce oral land sale contracts. In contrast, other courts hold the opposite view that oral contracts may still have some degree of contractual effect. This results in uncertainty throughout Mainland China, which may cause injustice and unfairness to claimants and may undermine the authority of the law and the courts. This paper argues that the solution to the problem is to propose a legal reform initiative to articulate that written form is mandatory for land sale contracts. This initiative will end the contradictory cases and ensure claimants are treated equally at law in this particular matter.
In order to support and underpin the legal reform initiative, this paper utilizes American doctrines to enrich the Chinese literature and draws on the American experience (particularly Professor Lon Fuller's and Professor Karl Llewellyn's analysis) in establishing that written form is desirable for land sale contracts in Mainland China. This is through a comparative law approach known as functionalism that examines the similarities and differences of the compared jurisdictions.
Sunday, January 31, 2016
This past Friday I had the pleasure of participating in a symposium on Housing for Vulnerable Populations and the Middle Class: Revisiting Housing Rights and Policies in a Time of Expanding Crisis, hosted by the wonderful faculty and law review folks at the University of San Francisco School of Law (and a special hat tip to our very gracious host, Tim Iglesias). The timing of this gathering couldn’t have been better. 2015 was a busy year in the housing world as SCOTUS upheld the validity of the disparate impact theory under the Fair Housing Act and HUD issued its significantly updated regulations on the obligation to affirmatively further fair housing. Moreover, cities and local governments are being looked to more than ever to solve major and seemingly intractable issues around housing, spurring a host of new policies, programs, and initiatives. The impressive participants of the USF symposium (coming from practice, government, non-profit, and the academy) explored these and related issues, including potential solutions to pressing problems of housing. Here’s an overview of what the panelists had to say:
What’s the matter with housing?
Rachel Bratt (Harvard Joint Center) kicked off the day by giving an overview of the nation’s current housing woes. She noted that the increase in income inequality over the last 20 years, combined with disinvestment and misinvestment of public resources, has been at the core of the affordable housing issue. She also described how political spending has played a role in further entrenching existing housing interests (in 2015, $234M was spend on real estate/finance lobbying, second only to healthcare). Bratt also explained the uneven distribution of federal housing benefits to the wealthy and the continued persistence of concentrated racial segregation. Rosie Tighe (Cleveland State-Urban Affairs) followed by describing the particular housing problems facing so-called “shrinking cities” (those places in an intense population-decline). She noted that the issue for these cities has more to do with poor quality affordable housing, rather than quantity. Tighe described the failure of low-income housing tax credits to meet the needs of these locales, and discussed the need for more scattered-site developments in these areas, while recognizing the financing and property management challenges inherent in such developments. Peter Dreier (Occidental-Poli Sci) rounded-out the discussion by pointing out that the current political discussions around the presidential election have focused much on wages and other issues, but not at all on housing. He described some reasons for the absence of attention to this important area, and drew the strong connection between household over-all health and housing.
What’s the matter with our current solutions?
Chris Odinet (Southern) started the discussion by describing some current efforts by states and local governments to deal with the fall-out from the housing crisis and on-going issues of blight and abandoned property. He then explained a number of recent federal court cases and acts taken by the FHFA that have significantly frustrated these efforts and also seriously call into question the ability of states and local governments to be innovative in dealing with issues of housing when federal programs are involved. Michael Allen (Relman, Dane, & Colfax) discussed the Fair Housing Act and the new “affirmatively furthering” regulations. He went into depth on contemporary disagreements between affordable housing advocates (who support more affordable units) and fair housing groups (who support integrated housing, and advocated for a way to reconcile their views under the auspices of these new HUD regulations. John Infrana (Suffolk) followed by describing the types of housing in and changing household composition of many cities. Despite these changing demographics, however, housing has not kept pace. In connection with this, Infranca pointed to the many possibilities that micro-housing and accessory-dwelling units (ADU) provide in the way of meeting this need. He noted that ADUs allow for greater economic diversity and can better align with demographic trends, but noted current legal barriers to them such as occupancy requirements and zoning restrictions. Marcia Rosen and Jessica Cassella (both of the National Housing Law Project)) concluded the panel by discussing the current state of the public housing program in the U.S., noting that there are currently 1.2M units (and ever-declining). She described HUD’s recent efforts to give public housing authorities (PHAs) a financing tool to rehab and rebuild these properties through the Rental Assistance Demonstration Program (RAD). This program essentially allows PHAs to convert their public housing stock into section 8 funded housing, and to combine section 8 with tax credits and other forms of debt and equity financing to fund the project. Cassella stated that although the program has great potential in terms of revamping old and decaying public housing properties, there are draw-backs in the way of transparency and long-term funding stability.
What are some new solutions?
For this final panel, John Emmeus Davis (Burlington Community Development Associates) gave an overview of community land trusts (CLTs)—currently over 280 exist nationwide—and their successes across the country. He noted that these types of entities are usually most successful in communities where there would otherwise be no affordable housing available. He noted the ability of CLTs to empower communities, protect tenants, and provide street-level land reform. Andrea Boyack (Washburn) followed by noting the current lack of rental stock compared to the growing demand across the country. She pointed out that in 2015 over half of the population of the U.S. is renting, with an annual demand of 300K new rental units per year. She followed by describing some current statistical trends in American homeownership and posited a number of ways in which cities and states in particular can seek to achieve solutions to these major housing problems. Lastly, Lisa Alexander (Wisconsin) discussed the the human right to housing, not through the lens of federal law, but rather through the ways in which localities across the country are building legal structures that provide many of the rights associated with a right to housing. She noted that market participation has been important to this process, and she used the “tiny homes for the homeless” movement and community control of vacant land as examples.
You can watch each of these presentations by clicking on the youtube video above. Participants, moderators, and USF Dean John Trasviña (former HUD assistant secretary for fair housing) are pictured below.
January 31, 2016 in Conferences, Home and Housing, Land Use, Landlord-Tenant, Law Reform, Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recording and Title Issues, Takings | Permalink | Comments (0)
Wednesday, July 13, 2011
One the topic of taxing non-profits, here's an idea from LTVfan, one of our commentators:
I'm heartily in favor of taxing the land under nonprofit buildings; I'd favor exempting the buildings themselves from taxation. Valuing land well and accurately is relatively easy; valuing buildings, particularly special-purpose buildings like churches, is much more difficult and expensive.
Many downtown churches sit on large pieces of land, bought decades or centuries ago, perhaps with the foresight of land speculators in the lay leadership. Frequently, the land is underused, and currently no mechanism exists to nudge it into more use.
But I encourage you to consider the effects (and costs) of taxing ANY buildings, and submit that we'd be wiser to simply tax land value, and treat buildings and their contents as private property, not subject to taxation. Land value, unlike the value of buildings and personal property, is created by the community, and is thus a logical and just base for taxation.
You might explore Henry George's Single Tax, best laid out in his landmark book, "Progress and Poverty," available online at its dot org.
For those that haven't kept up with the career of Marion Barry, you'll be happy to hear that the erstwhile crack smoking mayor of D.C. is back on the city council. And not only is he back, he's proposing aggressively stupid legislation. Specifically, Barry plans to introduce a bill that would ban the construction of all new apartment buildings in his Ward (Here's a copy of the Bill's text). Why??? Barry thinks this plan will encourage home-ownership and the renovation of the area's dilapidated housing. "The American dream is to own a home. And black people have not gotten the American dream as much as they need to," he says. "Somebody can rent for 20 years, and has no equity in their unit at all."
It's hard to see how this bill helps the people of Ward 8 in any way. If anything D.C. in general, and Ward 8 in particular, needs denser & more affordable housing. Right now, DC's population is exploding. So any proposal to artificially limit the supply of available rentals seems likely to push (poor) long-term residents out of the neighborhood. It's also tough to comprehend how this land use measure would help the folks of Ward 8 acquire the downpayments and credit history that are the normal barriers to home ownership.
Perhaps the really interesting question here isn't about the policy but rather, why do people in D.C. keep voting for Barry?
Wednesday, April 27, 2011
Rick Hills (NYU) and David Schleicher (George Mason) have posted Balancing the 'Zoning Budget' (Case Western Law Review) on SSRN. Here's the abstract:
The politics of urban land use frustrate even the best intentions. A number of cities have made strong political commitments to increasing their local housing supply in the face of a crisis of affordability and availability in urban housing. However, their decisions to engage in “up-zoning,” or increases in the areas in which new housing can be built, are often offset by even more “down-zoning” or laws that decrease the ability of residents in a designated area to build new housing as-of-right. The result is that housing availability does not increase by anywhere near the promises of elected officials.
In this essay, we argue that the difficulty cities face in increasing local housing supply is a result of the seriatim nature of local land use decisions. Because each down-zoning decision has only a small effect on the housing supply, citywide forces spend little political capital fighting them, leaving the field to neighborhood groups who care deeply. Further, because down-zoning decisions are made in advance of any proposed new development, the most active interest group in favor of new housing – developers – takes a pass on lobbying. The result is an uneven playing field in favor of down-zoning.
Drawing on examples of “extra-congressional procedure” like federal base closing commissions and the Reciprocal Trade Act of 1933, we argue that local governments can solve this problem by changing the procedure by which they consider zoning decisions. Specifically, they should pass laws that require the city to create a local “zoning budget” each year. All deviations downward from planned growth in housing supply expressed in the budget should have to be offset by corresponding increases elsewhere in buildable as-of-right land. This would reduce the degree to which universal logrolling coalitions can form among anti-development neighborhood groups and would create incentives for pro-development forces to lobby against down-zonings in which they currently have little interest. The result should be housing policy that more closely tracks local preferences on housing development.
Tuesday, April 26, 2011
Michael Blumm (Lewis & Clark) and R.D. Guthrie (Lewis & Clark) have posted Internationalizing the Public Trust Doctrine: Natural Law and Constitutional and Statutory Approaches to Fulifilling the Saxion Vision (U.C. Davis Law Review). Here's the abstract:
The public trust doctrine, an ancient doctrine emanating from Roman law and inherited from England by the American states, has been extended in recent years beyond its traditional role in protecting public uses of navigable waters to include new resources like groundwater and for new purposes like preserving ecological function. But those state-law developments, coming slowly and haphazardly, have failed to fulfill the vision that Professor Joseph Sax sketched in his landmark article of forty years ago. However, in the last two decades, several countries in South Asia, Africa, and the Western Hemisphere have discovered that the public trust doctrine is fundamental to their jurisprudence, due to natural law or to constitutional or statutory interpretation. In these dozen countries, the doctrine is likely to supply environmental protection for all natural resources, not just public access to navigable waters. This international public trust case law also incorporates principles of precaution, sustainable development, and intergenerational equity; accords plaintiffs liberalized public standing; and reflects a judicial willingness to oversee complex remedies. These developments make the non-U.S. public trust case law a much better reflection than U.S. case law of Professor Sax’s vision of the doctrine.
Yuanshi Bu (Freiburg) has posted Security Rights in Property in Chinese Law - An Unattainable Goal to Construct a Coherent Legal Regime? (European Private Law Review). Here's the abstract:
Chinese property law was codified in March 2007. Being an important component, existing provisions governing security rights in property have been consolidated in the newly passed Property Act. The aim of this article is to analyze several highly controversial questions in detail such as creation and perfection, accessoriness and foreclosure of security rights, security rights in bankruptcy proceedings, priority rules, mortgages in movables and immovables, floating charge, restrictions on disposal rights of the security grantor as well as bona fide acquisition of security rights. The analysis reveals challenges brought about by incomplete mixed borrowings of foreign laws that China is now faced with in constructing an internally coherent and nationally uniform property law regime.
Tuesday, March 29, 2011
It's bad to close the barn door after the horse is gone. But it's just as bad to fill the barn back up with horses, then reassure everyone that it is now secure, because the barn door is only open wide enough for the horses to escape in single file. That's what the FDIC appears to be ready to do with regard to mortgage-backed securities.
According to the New York Times, the FDIC is about to adopt rules that would go a long way to correcting some systemically catastrophic faults in the securitization business. For that, they deserve praise (and I should point out, the FDIC under the admirable Sheila Bair has truly been a stand-up force throughout this mess). But going a long way is like closing the barn door most of the way -- it doesn't help much if the horses can still slip through.
Frequent readers here might remember that I've argued several times that the single most effective way to reform the MBS industry is to require loan originators to retain a certain percentage of the loans they make, and to choose those retained randomly. I've suggested 20% be retained in-house, randomly chosen. The MBS industry can thrive, providing liquidity for the residential market, but originators are bound to the risk of the loans they originate, which creates every incentive for them to lend wisely.
The proposed FDIC rules, thankfully, adopt that very principle -- but then gut it in the details.
Rather than a simple percentage rule with randomized selection for the retained loans, under the proposed rules,
- high quality loans are exempt from the risk retention pool, off-the-top;
- only 5% of the risk from mortgage-backed securities derived from lower quality of loans that make up the risk retention pool must be retained;
- the risk can be split among the loan originator, loan aggregators, and loan securitizers -- that effectively reduces the risk to any of them well below the 5% line;
- the lenders have considerable flexibility in choosing their method of exposure to the 5% risk -- either by retaining a 5% exposure in all securitizations, or retaining a representative sample of loans in-house equivalent to a 5% exposure -- but the proposed rules do not specify a mechanism by which the 5% are selected or determined to be 'representative.'
The proposed rules do not do enough, in my opinion, to make sure that the risk retained by originators is of sufficient quantity and quality to incentivize them to make only sensible loans. Under the system that crashed the U.S. economy in 2008, lenders could reap the benefit of originating all loans, since the cost of originating bad ones was externalized to the usually uninformed holders of MBSs. There are lots of potential ways of reforming the system, but none is as clean and efficient as requiring that a substantial portion (I still say 20%, as is required in Canada, which did not suffer an MBS crash) of risk is retained in-house, and that percentage is chosen randomly. That system requires relatively little oversight, and no wiggle room for escape.
The proposed rules don't leave the barn door open as much as they might have, but closing it 2/3rds of the way doesn't help much if the horses can still get out.
There will be a comment period after the proposed rules are announced. I hope to submit some, and I'd like to hear yours.
Mark A. Edwards
[comments are held for approval, so there will be some delay in posting]
Friday, February 11, 2011
The White House released a proposal today that would dramatically alter the long-term future of the American housing financing market, in ways that are almost as important and fundamental as the creation of the FNMA (later Fannie Mae) in 1938.
Starting in 1938, the U.S. government created and became the most important -- and often only -- player in the secondary mortgage market. The FNMA bought loans and mortgages from banks, thereby allowing lenders to transfer the risk of default, but only if those loans met certain quality standards. The secondary mortgage market was a great success and was responsible for much of the post-war housing boom in America. The FNMA was semi-privatized in 1968, becoming Fannie Mae. It helped created the mortgage-backed securities market, but when faced with competition from other players in the secondary mortgage market who captured market share by purchasing and securitizing loans that didn't meet its quality standards, Fannie Mae lowered its standards. Because the appetite of investors for mortgage-backed securities was voracious, there was soon a race to the bottom through subprime lending. Because Fannie Mae still had special privileges with regard to taxation and borrowing from the federal government, many investors assumed or gambled that Fannie Mae would be rescued by the federal government in the event it began to crash. It did, and they were right.
The new plan's main objective is to release the United States from it's role as a de facto backstop for Fannie Mae, so that taxpayers aren't liable for reckless lending -- and presumably, so that reckless lending is less likely since liability for it will stay with lenders. It offers 3 paths to that goal, essentially gradations of the same objective -- either (1) limiting its backstop role to certain targeted borrowers (such as lower income borrowers purchasing affordable housing), who meet the previously enforced Fannie Mae quality standards; (2) limiting its role to those borrowers during a time of crisis; or (3) eliminating its backstop role entirely.
If implemented, any of these plans is likely to raise the cost of borrowing, since the risk of default must be priced into the private market system in ways that it may not have been previously. I intend to write more about the plan's implications as I have more time to study it, but it is safe to say that what is envisioned is a reduced participatory role for the government in home lending; what isn't yet clear to me is whether the regulatory role of the government will increase or decrease correspondingly.
An apparently ideologically-distasteful truth in this mess is that the FNMA worked very well from 1938 to 1968. But there is no stomach now for a government agency capturing an entire private market, even though it was able to impose quality standards that kept the market stable and functioning. Since there is no stomach to dominate the market, the question is whether any participation is appropriate. The plan's answer: perhaps, but only in the most limited sense. My concern is that in the absence of significant particpation, quality assurance can only be achieved either by extensive oversight, or by rules that cause lenders to impose quality on themselves.
Given that, I still like my half-baked idea: lenders can make loans on whatever terms they choose, but they can't sell them all on the secondary market. Instead some percentage -- let's say 20% -- must stay in-house in the portfolio of the originator. But here's the key: that 20% is chosen randomly, by some computer sitting in a government agency that knows only the loan number. It's lending Russian roulette. Lenders can decide there own risk tolerance, but they can't fully escape it. That should reduced the number of risky loans.
Meanwhile, the 80% of loans that enter the secondary market create capital for home lending.
Got another idea? Speak up -- let's get in on the conversation about the future of housing finance in the United States. If not us, who?
Mark A. Edwards
[comments are held for approval, so there will be some delay in posting]
Sunday, November 28, 2010
To get a sense of how badly the legal system has responded to the foreclosure crisis, consider this: we are three years into it, hundreds of thousands have lost their homes, states like Florida are running outrageous special foreclosure courts where retired judges aim to process 200 foreclosures per day -- and only now are actors in the system beginning to ask whether the parties seeking foreclosure and eviction actually have standing.
Standing is -- or should be -- question #2 in any legal proceeding (right after jurisdiction). But in Florida, here are the questions that are asked, according to the Wall Street Journal, no less:
"'Case No. 136,' the clerk intoned. 'Wells Fargo versus Edward Callahan.'
Judge Carlin asked whether the man was living in the house and was current on his mortgage. He answered no to both questions.
'Your house will be sold in 45 days,'' said the judge. 'That's all for today.'
Case time: 15 seconds."
Public interest lawyers like Prentiss Cox here in Minnesota have been fighting a lonely battle for a long time, trying to get courts to demand that parties attempting to foreclose demonstrate standing. A handful of judges, like Judge Arthur Schack in New York, have occasionally demanded this absolutely basic threshold issue be resolved first. But they are tiny grains of sand in the foreclosure machine.
But maybe -- maybe -- people who take the rule of law seriously are finally beginning to be heard.
The New York Times reports today that the U.S. Trustee is beginning to demand that foreclosers demonstrate standing in bankruptcy cases. That news isn't amazing; what's amazing is that it is news.
I spend a lot of my time researching property rights restitution issues. I've often argued that restitution is among the most complex and important issues in the world of property rights today. Complex, because once someone has been wrongfully dispossessed of property, restoring it to them becomes almost impossibly difficult over time; important, because few things create as much lasting bitterness as the wrongful dispossession of property (see, e.g., crisis, Israeli-Palestinian).
One day, we may well look back at the foreclosure crisis and ask, to paraphrase David Byrne, 'my god, what have we done?'
Mark A. Edwards
[comments are held for approval, so there will be some delay in posting]
Monday, November 15, 2010
At its core, the mortgage-backed securities crisis is the product of an inadequately regulated mortgage-industry system. This inadequacy resulted in a massive transfer of wealth from you and me to lenders and investment banks, and an economic crisis that continues the plague the country.
So I've been playing a thought-game: what's the smallest amount of regulatory reform that would completely prevent this disaster from recurring?
I've got a nominee.
Before I explain it, I need explain how we got to the point where we need it. To that end, here's the mortgage-backed securities crisis, in 10 easy-to-understand steps!
(follow the bump)
Tuesday, September 14, 2010
John A. Lovett (Loyola New Orleans) has posted Progressive Property in Action: The Land Reform (Scotland) Act 2003 on SSRN. Here's the abstract:
This article responds to a material deficit at the heart of American property law scholarship. For years, property scholars have debated whether the right to exclude deserves to be the centerpiece of our property regime in the United States. This article seeks to transform that debate by introducing to an American audience a remarkable piece of property legislation recently enacted in Scotland. Part I of the Land Reform (Scotland) Act 2003 creates a right of responsible, non-motorized access across almost all land and in-land water in Scotland, private as well as publicly owned, for purposes of recreation, education and passage. This legislation thus reverses the traditionally robust, ex ante presumption in favor of a landowner’s right to exclude and replaces it with an equally robust, ex ante presumption in favor of the public’s right of responsible access. By introducing this new property right in Scotland and creating an entire property regime to contextualize the right, a regime that is much bolder, in fact, than has been established in England and Wales under the better known Countryside and Rights of Way Act 2000, Scotland has provided property scholars with a case study in property law institutional design that is unique in modern legal systems. This article will demonstrate how the LRSA reveals that it is possible for a property regime to promote the ends of human flourishing without necessarily sacrificing all of the efficiency gains and coordination benefits that flow from the common law’s traditional preference for rules of exclusion.
[Comments are held for approval, so there will be some delay in posting]
Thursday, August 5, 2010
Thanks to a post by Kathleen Bergin at the Faculty Lounge, I see that NCCUSL has approved the Uniform Partition of Heirs Property Act. I haven't had a chance to read it yet, but it might make sense to incorporate the UPHPA into your coverage of concurrent interests. Of course, we'll have to see whether states adopt it over the next couple of years.
[Comments are held for approval, so there will be some delay in posting]
Saturday, August 5, 2006
I'm intrigued and heartened by Congress' recent legislation ensuring the right to display the American flag, even if condominum covenants or lease terms bar the display. Nice story from my childhood hometown newspaper, The [Chester County] Daily Local News here.
The full text of H.R. 42 is available here. Here are some key provisions:
SEC. 3. RIGHT TO DISPLAY THE FLAG OF THE UNITED STATES.
A condominium association, cooperative association, or residential real estate management association may not adopt or enforce any policy, or enter into any agreement, that would restrict or prevent a member of the association from displaying the flag of the United States on residential property within the association with respect to which such member has a separate ownership interest or a right to exclusive possession or use.
SEC. 4. LIMITATIONS.
Nothing in this Act shall be considered to permit any display or use that is inconsistent with--
(1) any provision of chapter 1 of title 4, United States Code, or any rule or custom pertaining to the proper display or use of the flag of the United States (as established pursuant to such chapter or any otherwise applicable provision of law); or (2) any reasonable restriction pertaining to the time, place, or manner of displaying the flag of the United States necessary to protect a substantial interest of the condominium association, cooperative association, or residential real estate management association.
More fodder for Jim Smith's excellent work on The Law of Yards, 33 Ecology Law Quarterly 203-231 (2006). And heartening news for those of us who like to see limitations on the power of neighborhood associations. Of course, some of this might also be handled by the Restatement (Third) of Servitudes § 3.1(2).
I wanted to have an illustration of a flag displayed at a house (hence the first illustration, from our friends at the Library of Congress). However, I also wanted a little color on this story; hence the second illustration (also from our friends at LOC).
Alfred L. Brophy
Comments are held for approval, so they will not appear immediately.