PropertyProf Blog

Editor: Stephen Clowney
Univ. of Kentucky College of Law

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Wednesday, May 4, 2011

Rose on The Due Process Rights of Tenants in Mortgage Foreclosure

Rose Henry Rose (Loyola Chicago) has posted The Due Process Rights of Residential Tenants in Mortgage Foreclosure Cases (New Mexico Law Review) on SSRN.  Here's the abstract:

The purpose of this article is to explore the rights of tenants who reside in buildings undergoing foreclosure to receive notice and an opportunity to be heard when foreclosures threaten to terminate their tenancies. The federal Protecting Tenants at Foreclosure Act of 2009 (PTFA) will significantly reduce the incidence of residential tenancies being terminated as a result of foreclosure. However, PTFA offers weak procedural protections if the mortgagee or the person who acquires ownership pursuant to a foreclosure seeks to terminate the tenancies of residents in the foreclosed building. In those states that require judicial foreclosures, the Due Process Clause of the Fourteenth Amendment to the United States Constitution should afford tenants faced with termination of their tenancies due to foreclosure with notice and an opportunity to be heard before their tenancies are terminated. In states that allow non-judicial foreclosures, Due Process protections are not likely to be available to tenants due to a lack of state action in the foreclosure process. PTFA should be amended to afford all tenants, including those who reside in non-judicial foreclosure states, with notice and an opportunity to be heard before their tenancies are terminated pursuant to a foreclosure.

Steve Clowney

May 4, 2011 in Landlord-Tenant, Mortgage Crisis, Real Estate Transactions, Recent Scholarship | Permalink | Comments (1) | TrackBack (0)

Tuesday, May 3, 2011

The Resurgence of Servants' Quarters in New York City

The NY Times proflies a number of new high-end developments that are building "maid's rooms" into their larger apartments. A gilded age, indeed:

Maid’s rooms built in the 1910s and 1920s tended to be barely six to seven feet wide. Apartments that came equipped with them have three or more family bedrooms and might originally have had more than one maid’s room. At 905 West End, the developer Samson Management took a Classic 8 — which had three bedrooms, a living room, a dining room, a kitchen and two maid’s rooms off of the kitchen — and shifted and expanded the bathroom that had been shared by the maid’s rooms, combining the remaining space to create one larger room.

“This way, for people who can have live-in help, they don’t need to fit them in a tiny box; they can have a proper bedroom,” said Louise Phillips Forbes, an executive vice president at Halstead Property who is heading up sales for the building. Listed as four-bedroom apartments, they range from $2.74 million to $2.925 million.

Steve Clowney

May 3, 2011 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 27, 2011

Borden and Vattamala on Series LLCs in Real Estate Transactions

Bradley Borden (Brooklyn) and Mathews Vattamala (Student-Brooklyn) have posted Series LLCs in Real Estate Transactions (Real Property, Probate, and Trust Law Journal) on SSRN.  Here's the abstract:

Series limited liability companies are a fairly new form of business entity. Some observers worry that series limited liability companies are untested and business and property owners should wait to use them. Meanwhile, tax and business law practitioners are moving forward, recommending that their clients take advantage of the opportunities series limited liability companies present. This article reviews the growing popularity of series limited liability companies and the statutory framework of the Delaware series limited liability company statute. It suggests that any hesitancy to use series limited liability companies is unfounded and that they will continue to grow in popularity. The article then discusses the tax classification of series, concluding that recently proposed Treasury regulations provide property and business owners considerable latitude in choosing the tax classification of series. Finally, the article illustrates how property owners may use series limited liability companies to minimize the complexities of ownership and transactional structures.

Steve Clowney

April 27, 2011 in Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 26, 2011

Buying a Home: There's an App for That

The Wall Street Journal Reports that if you're in the market to buy a new home there's a "slew of new smartphone apps aim to make the job easier and save you time."  Again, why do we still need realtors?

Steve Clowney

April 26, 2011 in Real Estate Transactions | Permalink | Comments (2) | TrackBack (0)

Tuesday, April 5, 2011

A House With a History

The New York times ran a story on Sunday about a "psychologically impacted" home in Windsor Terrace, Brooklyn.  Four months ago, the owner was stabbed to death by her son.  The article asks whether, "[i]n a city with a relative shortage of good housing, [does] the fact that someone has recently died in a home barely elicits a shrug from buyers"? 

According to James Larson and Joseph Coleman, the answer is probably, "Yes."  Laresen and Coleman, business professors at Wright State, conducted a study of 100 psycologicall impacted homes - places that had been the site of a murder, suicide or illness.  They found that such properties take 50 percent longer to sell than comparable homes and bring in an average of 2.4 percent less.  All good facts for the next time I teach Stambovsky.

Steve Clowney

April 5, 2011 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Odinet on International Real Estate Transactions

OdinetC Christopher Odinet (Phelps Dunbar) has posed Towards a Convention for the International Sale of Real Property: Challenges, Commonalities, and Possibilities (Quinnipiac Law Review) on SSRN.  Here's the abstract:  

In a world that is increasingly global in scope, society has come to view the ever-growing body of international commercial laws as being exceptionally important. This is evidenced through the adoption of several high profile pieces of legislation over the past several decades: International Interest in Mobile Equipment - Study LXXI, the EU’s Draft Common Frame of Reference, the EU Directives on Consumer Protection, and, most noteworthy of all, the Convention for the International Sale of Goods (CISG).

As raised by Professors Sprankling, Coletta, and Mirow, what has been conspicuously absent from this growing body of laws is an international framework for the sale of real property across national borders. This absence is not surprising, considering the way society has historically conceptualized property law. Real property is local and individualistic in nature. The laws governing real property vary from country to country and even region to region. Property law is both rigid and inflexible, thus there is very little opportunity for the parties to a real estate transaction to materially modify or shape the contract. However, times have changed and so has the way people think about real property transactions. The sale of real property increasingly reaches across these national borders. The purchasing of vacation homes in other countries, the acquisition of real property for those who live near border areas, and the acquiring of real property by multi-national and international companies is an undeniable part of the global economy. Society has come to realize the integral part that real estate transactions play in a robust global economy.

The time has come for a rethinking of the way society views real property. This involves a questioning of the current legal patchwork governing real estate transactions that an international buyer must navigate in order to consummate the sale. In so doing, jurisdictions should take the next step on the road toward an ever-more vibrant global economy: the creation and global adoption of a framework for the international sale of real property.

This article begins a discussion of whether a convention for the international sale of real property, akin to the highly successful and somewhat similar CISG, could realistically be developed and, in doing so, hopes that future scholars and policy-makers will continue to explore the possibility of such a system. This is accomplished by reviewing three common features of all real property contracts - contract formalities, warranties of title, and security financing - and discusses their importance to an international investor. It further examines how three different countries currently which are highly engaged in international business and investment - the U.S., China, and France - view contract formation requirements, warranties, and security financing, and determines, based on general comparisons, whether a convention for the international sale of real property could be developed for each basic real property contract provision. Finally, this Article concludes by arguing the many existing shared contract principles in each of the subject countries makes an international framework, at least with regards to these particular provisions, very promising.

Steve Clowney

April 5, 2011 in Real Estate Transactions, Recent Scholarship | Permalink | Comments (1) | TrackBack (0)

Monday, March 7, 2011

Marsh on the Commercial Real Estate Debt Crisis (again)

I have posted Too Big to Fail vs. Too Small to Notice: Addressing the Commercial Real Estate Debt Crisis on SSRN. (This is the bigger article that I teased earlier.)

I have directed this article to policymakers and scholars, but I hope that it may also be useful for those teaching Real Estate Transactions, to supplement textbooks by providing a current snapshot of the state of the commercial real estate industry.  

Many thanks to Jim Durham of Dayton for taking time out of his vacation to read and comment on this piece! 

Here's my abstract:

The commercial real estate industry has been devastated by the current economic crisis, losing 40% in value since the end of 2007. As a result, commercial real estate borrowers owe lenders $1 trillion more than their properties are worth. Although the federal government has been warned that the commercial real estate debt crisis may cause a double-dip recession, the government’s response thus far has been to allow the market to work itself out. This Article argues that this laissez faire response rests upon flawed assumptions about the structure of the commercial real estate industry. Compounding the problem, policymakers are incorrectly interpreting increased lending and transactions in the upper echelons of the market as a signal that their policies are working. Instead, the current approach has forced sales at distressed prices, numerous foreclosures, and, perhaps most importantly, significant small bank failures without any systemic benefits. Policymakers have seen these losses as an unfortunate but unavoidable cost of the recovery process, and dismissed these small actors as not “systemically important.” In fact, this Article argues that in the aggregate, small commercial real estate borrowers and small banks are vital to fueling job creation and economic recovery. By focusing primarily on the health of large financial institutions, borrowers, and properties without due consideration for the smaller players, the current policy may lengthen the economic crisis by placing further stress and uncertainty on some of the most vulnerable segments of the economy.

As always, comments are much appreciated!

Tanya Marsh

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March 7, 2011 in Mortgage Crisis, Real Estate Transactions, Recent Scholarship, Teaching | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 22, 2011

Can an E-mail Satisfy the Statute of Frauds?

It can in New York, according to the 2010 decision in Naldi v. Grunberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y.A.D. 2010). In the opinion, the court wrote that "[W]e would conclude that the terms "writing" and "subscribed" in General Obligations Law §5-703 should now be construed to include, respectively, records of electronic communications and electronic signatures, notwithstanding the limited scope of the 1994 amendment of the general statute of frauds." 

This case concerned a dispute over whether a binding right of first refusal for real property could be created via e-mail.  It is interesting because although the court rejected the argument that the e-mail did not satisfy the statute of frauds, it held that the right of first refusal was not created because there was no meeting of the minds. 

You can find a copy of the opinion here and a recent piece in the New York Times, urging caution when sending e-mails about real estate transactions, here.

Tanya Marsh

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February 22, 2011 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Friday, February 11, 2011

White House Releases Plan for the Future of Housing Financing Market

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

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February 11, 2011 in Home and Housing, Law Reform, Mortgage Crisis, Real Estate Finance, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 8, 2010

Charting Commercial Real Estate Delinquencies

I have been a total blogging slacker, for which I apologize.  I've been fairly obsessed with commercial real estate debt for the past month or so and reading documents with lots of numbers.  One such document is the Mortgage Bankers Association report on delinquency rates in the third quarter of 2010.  Not good news.  I have made a nifty chart to illustrate this data which I will hopefully attach to this post without incident:

Workbook2 Sheet1
Source:  Mortgage Bankers Association, Mortgage Delinquency Rates Among Major Investor Groups Q3 2010, December 2010.

The best estimates are that $1.4 trillion of commercial real estate debt will mature before 2014, and the estimated equity gap (difference between refinancing proceeds and payoff amounts for prior debt) will exceed $800 billion.  I'm working on an article that attempts to describe how this problem came to be and what we might be able to do to solve it. If you have any thoughts on the subject, please share.

Tanya Marsh

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December 8, 2010 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 17, 2010

Summary of State Foreclosure Laws

My colleague Juliet Moringiello pointed me to the National Consumer Law Center's handy summary of state foreclosure laws.  Lost of useful stuff in there.

Ben Barros

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November 17, 2010 in Mortgage Crisis, Real Estate Finance, Real Estate Transactions | Permalink | Comments (1) | TrackBack (0)

Wednesday, November 3, 2010

US Shopping Center Law Conference

I'm heading to Hollywood (Florida, that is) for the annual US Shopping Center Law Conference, put on by the International Council of Shopping Centers.  They are expecting 1150 real estate transactional attorneys this year, up from the past few years. You can find details, and download the program (under the heading "Event Brochure" here.

For a real estate transactional attorney, the Shopping Center Law Conference is the best way to get a finger on the pulse of the practice.  Basic programs have titles like "Title Insurance and Surveys: From Point A to Point Z" and "Basics of Insurance" (you can blame me for that unexciting name -- that's the seminar I'm co-presenting).

But a number of programs each year also focus on timely issues, like "Minefields, Sheer Cliffs and Rough Roads: The Landscape of Loan Workouts in 2010" and "Economic Risks and Opportunities for Real Estate Following the Great Recession" (to be presented by Prof. Gyourko of Wharton).

It should be a great program this year and I encourage those teaching Real Estate Transactions to consider attending next year.

Tanya Marsh

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November 3, 2010 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Friday, October 22, 2010

Has the Worm Turned?

As the foreclosure crisis developed, it became quite clear that lenders were more than willing to assert the full scope of their legal rights (and then some) in subprime lending, securitizing and selling mortgage-backed securities, and foreclosing on delinquent loans.  Castigated for reckless lending to borrowers who didn't understand and couldn't hope to re-pay their loans, lenders seemed to collectively shrug and respond, 'Hey, it's legal.' 

Repeated pleas that lenders not evict blameless tenants in foreclosed properties (if only as a matter of self-interest, since lenders would have some income from the property) fell on deaf ears, requiring legislatures to act.  And as Brent T. White incisively argued, underwater homeowners felt a sense of moral and social responsibility that was not shared by their lenders, who enforced the letter of the law to maximize profits and minimize losses.

Has the worm turned?  As Tanya noted her post below, foreclosures are grinding to a halt because borrowers are having the temerity to demand in court that every last bit of the lenders' paperwork is in order -- and as it turns out, because lending was so reckless, and loans were sold and re-sold and packaged and re-packaged with such velocity on the go-go secondary and tertiary markets, often by companies that disappeared with their paperwork when the crisis began, there is precious little valid paperwork.  I imagine that somewhere, in some road-side storage facility in Nevada, a lot of documents that once belonged to a fly-by-night 'no-asset, no-income' lender are yellowing and curling at the edges.

And today in the New York Times, comes the story of a bunch of buyers who are using the letter of the law to back out of condo purchase agreements with their deposits in tow.  They aren't using the law as it was intended, but they are using it to its letter.  Is that unfair?  Hey, it's legal.

I have to admit, I'm disturbed by my willingness to cackle and shrug my shoulders.  By doing that, I'm mirroring the attitude of the mortgage-back securities machine that caused the crisis in the first place, an attitude which has disturbed a lot of us for a long time.  But, since the New York Times also reported today that on Wall Street, average pay increased 20% this year, I think I'll savor the impotent sense of schadenfreude for at least a few hours.

P.S. If you need help maintaining your irresponsible sense of glee at lenders' troubles, give a listen to the first segment of this This American Life episode, in which we meet several sneeringly ungrateful Wall Street bailout beneficiaries.  That should help.

Mark A. Edwards

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October 22, 2010 in Home and Housing, Mortgage Crisis, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Friday, October 1, 2010

Document Flaws in Mortgage Foreclosure Process

Today's NY Times has an interesting story about how various documentation issues are creating problems in the mortgage foreclosure process.  A taste:

The foreclosure machinery that has forced millions of Americans out of their homes is beginning to seize up as some lenders and their lawyers are accused of cutting corners in their pursuit of rapid home repossessions.

Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks....

As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners.

Apparently alarmed about such a possibility, one of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy.

Ben Barros

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October 1, 2010 in Real Estate Finance, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 29, 2010

Property LLMs?

In the last two weeks, LLM programs have come under scrutiny (See here, here, here, and here).  The general consensus seems to be that the master of law degree is valuable for aspiring tax attorneys and graduates of foreign law schools looking to work in the US.  What about the real property-based LLM?  At least four U.S. schools--John Marshall, Miami, Pace, and New York Law School--offer an advanced degree in Real Estate.  Shelby Green, Director of Pace's program, promoted the LLM as a solution to the growing complexity of Real Estate law (see here, pdf).  If I'm reading Prof. Green correctly, she's arguing that real estate practice--like tax--has become so complex and sub-specialized that an extra year of study is merited.  I think you could also argue that law schools do a rather poor job of teaching transactional skills and, thus, a year of focusing on negotiating and closing deals could give a student an edge in the job market. 

Does our audience have any sense if these programs are worth the cost and time?  Does having a real estate LLM give applicants a significant boost in hiring?  If an aspiring real estate attorney couldn't find work, would they be better off working for free in a real estate practice?

Steve Clowney

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September 29, 2010 in Real Estate Transactions | Permalink | Comments (3) | TrackBack (0)

Monday, September 27, 2010

Smith on The Structural Causes of Mortgage Fraud

Jim Smith (Georgia) has posted The Structural Causes of Mortgage Fraud on SSRN.  Here's the abstract:

Mortgage fraud, often a violation of federal and state criminal statutes, covers a number of different types of behavior, all of which have the common denominator of conduct that has the intent or effect of impairing the value of residential mortgage loans. Mortgage fraud has become prevalent over the past decade and shows no signs of diminishing despite the collapse of domestic housing markets during the past two years. This paper analyzes the complex relationships between prime mortgage loan markets, subprime markets, and various types of mortgage fraud. This paper concludes that the root causes of mortgage fraud are associated with the core institutional and structural components of mortgage markets, which cut across all types of residential mortgage products. The organizing principle is the historical evolution from proximity to distance within the mortgage market, which is explored along three axes. First, geographical distance between lenders and borrowers has replaced geographical proximity. The mortgage market is national, with local lending institutions no longer making a significant proportion of the loans that are originated. Second, transactional distance has replaced transactional proximity. Lenders and borrowers have little direct contact; instead intermediaries such as mortgage brokers, appraisers, insurers, and closing officers, separate the principals. Third, financial distance has replaced financial proximity. Previously both borrowers and lenders had significant financial interests in the mortgage loan transaction. The borrower had equity in the property, and the lender held the loan in its portfolio. Presently many borrowers have no equity (or negative equity) in their homes, and due to the securitization of loans through the secondary mortgage market, few originating lenders retain a stake in the loans they create. Reforms that could serve to reduce borrower-lender distance or to ameliorate its effects include the fashioning of better closing procedures for verifying borrower identity, providing a premium for community-bank loans to local borrowers, making originating lenders liable for all misconduct by appraisers, requiring significant down payments for borrowers, and allowing secondary market purchasers full recourse against originating lenders for losses caused by borrower defaults.

Ben Barros

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September 27, 2010 in Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 27, 2010

Pomeroy on Surprise Liens on Real Property

Chad J. Pomeroy (Fabian & Clendenin, P.C.) has posted Ending Surprise Liens on Real Property on SSRN.  Here's the abstract:

Academics, law makers, and the general public have long believed that "secret liens" are problematic. In real property, these are liens that are not recorded in the real property filing system. Secret liens become especially problematic when they are enforced, despite their secrecy, against subsequent purchasers of the property. If the purchaser does not satisfy the lien by paying the underlying debt, the lien holder can foreclose on the property. One of the main purposes of having real property recording statutes was to avoid "surprise liens" (secret liens afforded priority over subsequent purchasers) and ensure that real estate purchasers and investors are fully informed. Yet surprise liens continue to exist and are, in fact, increasingly accepted by lawmakers.

This Article examines two prototypical surprise liens – federal estate tax liens and mechanics’ liens – and proposes that these are indicative of a trend wherein modern lawmakers are increasingly tolerant of surprise liens. This Article then examines potential justifications for this deviation from the longstanding preference against these types of liens. First, some argue that property filing systems are economically inefficient. Second, some argue that creditors and purchasers do not actually check property filing systems. Finally, the Article identifies and addresses the possibility that law makers justify surprise liens based upon the identity of the lienor.

After examining these arguments, this Article concludes that the first two justifications are convincingly countered by existing economic theory and circumstances and that creditors and buyers do, in fact, rely on real property records. This leaves lienor identity as the true driver behind the rising acceptance of surprise liens. This justification, identified herein, is ultimately based upon the perceived social economic benefits arising from granting these favored classes the right to surprise liens. A careful examination of the full economic consequences of surprise liens, however, demonstrates that this justification is not sufficient and ultimately self-defeating.

Granting special rights to certain classes of lienors imposes higher individual costs than is commonly believed and also creates significant costs that likely counter any social economic benefits actually created. Additionally, surprise liens (even if economically justified) defeat basic conceptions of fairness inherent in the American system of jurisprudence and arising out of basic concepts of due process and social ethics. This Article therefore concludes that these liens should be removed through a strengthening of recording concepts at both a state and federal level.

Ben Barros

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July 27, 2010 in Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, July 16, 2010

Hauser on Home Mortgage Modification in Bankruptcy

Susan E. Hauser (North Carolina Central University - School of Law) has posted Cutting the Gordian Knot: The Case for Allowing Modification of Home Mortgages in Bankruptcy on SSRN.  Here's the abstract:

More than 5 million mortgages have gone into foreclosure since 2007, and an additional 8 to 13 million foreclosures are projected to follow before the current foreclosure crisis abates. Voluntary loan modification programs have failed to ameliorate the crisis, in large part because mortgage lending abuses and declining home values have left many borrowers stranded in "under-water" mortgages.

This article endorses a targeted amendment to section 1322(b)(2) of the Bankruptcy Code that would allow bankruptcy judges to oversee the modification of residential mortgages written to borrowers during years when mortgage-lending abuses were most rampant. Part I of this Article examines existing Bankruptcy Code provisions that allow the modification of other types of loans and then traces the history of the existing statutory and case law that currently prevents borrowers from modifying the terms of most residential mortgages in bankruptcy. Part II describes legislation presently pending in Congress and explains why allowing home mortgages to be modified in chapter 13 bankruptcy offers an efficient and fair solution that not only allows borrowers to remain in their homes, but also benefits lenders and taxpayers. Part III considers and distinguishes the counterarguments offered by the mortgage banking industry.

My conclusion is that allowing mortgages to be modified in chapter 13 plans offers distinct advantages to all parties. Accordingly, a time-limited amendment to section 1322(b)(2) would provide a simple and elegant mechanism for reducing the pain that the home mortgage crisis is causing to borrowers, communities, creditors, and the national economy.

Ben Barros

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July 16, 2010 in Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 6, 2010

Accounting Rule May Trigger Change in Commercial Real Estate

I likely think about accounting standards more than most people involved in real estate law, probably because I was in-house at a public real estate investment trust for five years.  So this recent article in the New York Times caught my eye as one example of the impact that accounting standards can have on customs and practices in the real estate industry.

If you're interested, more after the break.

Continue reading

July 6, 2010 in Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Friday, June 25, 2010

Does anyone read their mortgage documents? Judge Posner didn't.

According to Above the Law, Judge Richard Posner recently admitted at an American Constitution Society conference on regulation that when presented with voluminous documentation at his home equity closing, he signed on the dotted line without reading the paperwork.  David Lat, the Above the Law blogger, was incredulous:

"This generated laughter from the crowd, due to Judge Posner’s status as one of the greatest legal minds of his (or any other) generation. It was amusing to imagine the brilliant Posner flipping page after page of paperwork and mechanically scribbling next to every “Sign Here” flag, without even bothering to read what he was signing. It’s the kind of behavior one would expect from a person earning $35,000 and a buying a $600,000 home two hours outside of Phoenix, circa 2006 — but not from one of America’s leading jurists."

Point taken, but I'm with Judge Posner.  I have been a commercial real estate lawyer for ten years.  During that time, I have purchased two homes.  In both cases, I requested copies of the title work, exception documents, and loan documents from the title company and lender, respectively, prior to closing.  In both cases, they acted like I was completely unreasonable.  The title company couldn't understand why I wanted to review exception documents at all, and the lender couldn't see how the loan documents could be generated prior to closing.  In any event, they both implied, why bother reviewing documents that you cannot negotiate?  (By the way, the purchase agreement was also pretty much non-negotiable.  Standard realtor form, just check the boxes and fill in the blanks.)

This is in stark contrast to commercial real estate deals where everything, no matter how minor, is negotiated.  And I get the business reality -- the $20 million shopping center deal can absorb the transaction costs of negotiation while my house can't. 

But if Judge Posner and I both accept that reviewing form mortgage documents that cannot be changed is a waste of time, I wonder if the conventional wisdom of the mortgage crisis is holding far less legally sophisticated borrowers to a higher standard.

Tanya Marsh

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June 25, 2010 in Real Estate Transactions | Permalink | Comments (3) | TrackBack (0)