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)

Thursday, June 3, 2010

Way on Informal Homeownership

Heather K. Way (Texas) has posted Informal Homeownership in the United States and the Law on SSRN.  Here's the abstract:

This article examines how millions of lower-income families in the United States attempt to acquire title to their homes informally, outside the mortgage market and instead through mechanisms such as lease-to-own contracts and intestacy. Many of these families are left holding inferior and insecure title to their homes--if they hold title at all. The article explores the benefits and pitfalls of "informal homeownership" and the legal structures that perpetuate disparties between formal and informal homeownership. The article then proposes a series of legal reforms to help ensure that the American legal system provides lower-income families with better opportunities to obtain secure title to their homes.

Ben Barros

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June 3, 2010 in Home and Housing, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Sunday, May 23, 2010

White on Emotion and Strategic Default

Brent T. White (Arizona) has posted Take This House and Shove It: The Emotional Drivers of Strategic Default on SSRN.  Here's the abstract:

An increasingly influential view is that strategic defaulters make a rational choice to default because they have substantial negative equity. This article, which is based upon the personal accounts of over 350 individuals, argues that this depiction of strategic defaulters as rational actors is woefully incomplete. Negative equity alone does not drive many strategic defaulters’ decisions to intentionally stop paying their mortgages. Rather, their decisions to default are driven primarily by emotion – typically anxiety and hopelessness about their financial futures and anger at their lenders’ and the government’s unwillingness to help. If the government and the mortgage industry wish to stem the tide of strategic default, they must address these emotions.

Because emotions are primary, however, principal reductions may not be necessary. Rather, many underwater homeowners simply need some reason to feel less apprehensive about the financial consequences of continuing to pay their underwater mortgages. One possible way to provide this comfort would be a “rent-based loan program,” allowing underwater homeowners to refinance their entire balances to an interest rate that would bring their mortgage payment in line with the rental cost of a comparable home. Indeed, a rent-based approach would relieve many underwater homeowners’ financial anxiety and likely be enough alone to stem the tide of strategic default.

Ben Barros

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May 23, 2010 in Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, May 21, 2010

Rodriguez-Dod on Protecting Tenants from Foreclosure Evictions

Eloisa C. Rodriguez-Dod (Nova Southeastern) has posted Stop Shutting the Door on Renters: Protecting Tenants from Foreclosure Evictions on SSRN.  Here's the abstract:

This article discusses existing and proposed federal and state law affecting tenants’ rights in foreclosure. As “Foreclosure” signs rapidly join “For Sale” signs across the country, the national foreclosure crisis has not only displaced homeowners, but a plethora of renters as well. The approach taken by states concerning tenants affected by foreclosure varies greatly. Furthermore, a recently enacted federal law, created specifically to help tenants in foreclosure, does not relieve the uncertainty in resolving this issue. In addition to being the first to critique the new federal law, this article offers recommendations for legislation that may better protect tenants from foreclosure-related evictions.

Ben Barros

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May 21, 2010 in Landlord-Tenant, Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (1) | TrackBack (0)

Harris on Recourse and Non-Recourse Mortgages

Ron Harris (Tel Aviv) has posted Recourse and Non-Recourse Mortgages: Foreclosure, Bankruptcy, Policy on SSRN.  Here's the abstract:

The recourse-non-recourse dimension is fundamental in any loan as it deals most directly with the pool of assets out of which lender can collect at delinquency and default. This paper calls attention to an exceptional feature of the American home mortgage market, compared to mortgage markets elsewhere in the world, the prevalence of non-recourse mortgages as created by foreclosure rules in leading states such as California and Arizona and federal bankruptcy law. It explains how the legal impediments on recourse to personal assets and future income, together with the recent drop in home prices, led to a dramatic rise in strategic foreclosures (ones that resulted from negative equity rather than from cash-flow problems). No less than 588,000 strategic walk-away mortgage defaults took place, representing nearly 20% of all foreclosures in 2008. Most of these were not likely to happen in a recourse regime.

The paper then deals with policy. It uses a few theoretical frameworks: put option, default insurance, asset partitioning and screening. It examines the pros and cons of recourse regime and of non-recourse regime. It concludes that there is no compelling justification for prohibiting either recourse or non-recourse loans. The benefits and pitfalls of a dual regime are then examined. The question relating to why we don't observe a dual regime in the real world is addressed. The paper recommends that jurisdictions that prohibit recourse loans lift this prohibition. It concludes that both recourse and non-recourse should be on the table, on the levels of regulation policy and lending practices.

Ben Barros

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May 21, 2010 in Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (2) | TrackBack (0)

Monday, May 10, 2010

The Human Face of the Foreclosure Endgame

David Streitfeld had a fascinating and sobering piece in the New York Times this week, chronicling a day in the life of Joseph Laubinger, in essence a foreclosure 'fixer' who represents lenders in their last interactions with former homeowners still in actual possession of their homes before the sheriff arrives.  Laubinger's business has a simple goal but a complex task: getting foreclosed owners out as seamlessly as possible.  He gets a fee for getting the possessors out, and then gets to earn a commission by selling the house.  He comes face to face with the pain caused by the foreclosure crisis, and lest we forget, there is real, gut-wrenching human pain.

It's a somber job, and Laubinger is anything but cavalier; he is described in the article as "a soft touch," and regularly gives people in trouble extensions so they can find somewhere else to go rather than being rendered homeless.  On the day Streitfeld followed him, Laubinger encountered the Lukaszs, a young Polish couple in default on two loans secured by a modest home that they've been unable to sell for what they owe.  What did them in, like many others, was that Mrs. Lukasz became chronically and painfully ill; Mr. Lukasz's salary from working night shift at an envelope factory could cover the loan payments, or the pharmacy bills, but not both.  Enter Mr. Laubinger.  Mr. Lukasz agreed to accept $1500 to move out without a sheriff's eviction, but later changed his mind, deciding to stay until the last possible moment.  Another family of six encountered that day end up sheltered by their church.

Laubinger, to his credit, seems to treat these people with compassion.  The Lukasz's situation left him in tears.  In some strange and convoluted way, Mr. Laubinger's role and demeanor remind me of the great Bruno Ganz's angel of death in Wim Wender's breathtaking Wings of Desire, unable to prevent death but able to usher the victims out with some comfort. On the other hand, foreclosure isn't death, and angels don't have a profit motive.

Mark Edwards

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May 10, 2010 in Home and Housing, Mortgage Crisis, Real Estate Transactions | Permalink | Comments (2) | TrackBack (0)

Arruñada and Lehavi on New Models for Residential Development and Fiance

Benito Arruñada (Universitat Pompeu Fabra) and Amnon Lehavi (Interdisciplinary Center Herzliyah - Radzyner School of Law) have posted Prime Property Institutions for a Subprime Era: Exploring Innovative Models of Residential Development and Finance on SSRN.  Here's the abstract:

This paper breaks new ground toward contractual and institutional innovation in models of homeownership, equity building, and mortgage enforcement. Inspired by recent developments in the affordable housing sector and in other types of public financing schemes, this paper suggests extending institutional and financial strategies such as time- and place-based division of property rights, conditional subsidies, and credit mediation to alleviate the systemic risks of mortgage foreclosure. Alongside a for-profit shared equity scheme that would be led by local governments, we also outline a private market shared equity model, one of bootstrapping home buying with purchase options.

Ben Barros

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May 10, 2010 in Home and Housing, Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Monday, May 3, 2010

White on the Morality of Strategic Default

Brent T. White (Arizona) has posted Beyond Guilt in the Housing Crisis: The Morality of Strategic Default on SSRN.  Here's the abstract:

Responding to those who argue that homeowners who strategically default on their mortgages are immoral and socially irresponsible, this article argues that breaching a mortgage contract is not only morally acceptable, it may be the most responsible course of action when necessary to fulfill more important obligations to one’s family.

Ben Barros

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May 3, 2010 in Mortgage Crisis, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Thursday, April 29, 2010

The Blazed Locust Tree

I haven't been blogging that much lately, in part because my wife and I are in the process of buying a new house.  The house was built in 1810, and the property is in a pretty rural area.  The property description includes these gems:  "BEGINNING at a point immediately southeast of a white oak tree . . . thence by same, South 60 degrees East, 278.25 feet, more or less, to a blazed locust tree . . ."  We're having a survey done . . .

Ben Barros

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April 29, 2010 in Real Estate Transactions | Permalink | Comments (2) | TrackBack (0)

Tuesday, April 20, 2010

Sandercock and Lebovits on NY Landlord-Tenant Law

Margaret B. Sandercock and Gerald Lebovits (St. John's) have posted New York Residential Landlord-Tenant Law 101 for the Transactional Attorney on SSRN.  Here's the to-the-point abstract:

This article discusses the basics of New York residential landlord-tenant law for the transactional attorney.

Ben Barros

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April 20, 2010 in Landlord-Tenant, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, April 2, 2010

Moringiello on Mortgage Modification

Juliet M. Moringiello (Widener) has posted Mortgage Modification, Equitable Subordination, and the Honest but Unfortunate Creditor on SSRN.  Here's the abstract:

Mortgage foreclosures are at an all-time high and property values in many parts of the country have declined precipitously. Yet bankruptcy, which is often a last resort for individuals in financial distress, provides little relief to a homeowner who finds that her mortgage debt exceeds the value of her home. The reason for bankruptcy’s inadequacy in this regard is the Bankruptcy Code’s prohibition on the modification of home mortgages, a prohibition that became part of bankruptcy law in 1978, when most home mortgage loans were 30-year fixed rate loans made by savings and loan associations. While most secured loans can be stripped down in bankruptcy, reflecting the payment that the lender would receive if it were forced to foreclose on the collateral, a home mortgage loan must be paid in full, giving the lender more than it would receive under state law.

In recent years, abusive mortgage practices have proliferated. These abusive practices, which have prevented homeowners from building equity in their homes, harm not only the debtor, but also the debtor’s other creditors. Despite their behavior, however, home mortgage lenders who engage in these practices continue to receive favorable treatment in bankruptcy. In this paper, I argue that creditors should be denied special treatment in bankruptcy unless they behave in an “honest but unfortunate” manner. Judges can deny this special treatment by using a time-honored bankruptcy principle, the principle of equitable subordination, to subordinate the unsecured portion of a home mortgage loan to all secured and priority claims. While equitable subordination, by itself, will not solve the foreclosure crisis, it may, by reducing the claims of abusive mortgagees, deter abusive lending practices in the future.

Ben Barros

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April 2, 2010 in Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)