PropertyProf Blog

Zombies, Mortgages, and What New York State Is Doing About Them

(Photo Credit: Buffalo News)

Of the many ills that resulted from the 2008 financial crisis, none garnered such a fantastic moniker as did the “zombie mortgage crisis.” But despite its name, this isn’t an episode of The Walking Dead. Rather, the phrase refers to a practice by mortgage lenders (or, mortgage servicers to be more precise) whereby a notice of foreclosure would be given and the defaulted and distressed homeowner would typically move out in anticipation of a foreclosure sale. But then, the lender would decide not to go through with the foreclosure process after all.

Not finishing the process was typically due to the fact that the property was “underwater” (meaning that the net of the debt due on the mortgage loan and the value of the property subject to the mortgage was in the negative—the secured debt was greater than the value of the collateral, in commercial law terms). This meant that there was no chance the lender could recoup its losses at the sale, which typically resulted in the property becoming REO (owned by the lender itself). This might seem obvious, but lenders don’t like being property owners—they would rather get paid. One reason they really don’t like owning foreclosed property is because ownership comes with costs. For instance, the bank is going to have to pay any homeowners association dues that might be required (which failure to pay can result in a lien on the property). There could also be tort liabilities if someone is hurt on the premises. But the lender can avoid all of this (and did) by just not doing anything—leaving the house still titled in the name of the now-absent homeowner but also leaving the mortgage in place. Hence the name—the mortgage process is initiated, leading one (the homeowner) to believe that foreclosure will soon happen and the mortgage will be gone, only to have the mortgage linger on (potentially forever)--like a zombie. You get the gist...

If you want a great (or terrible, rather) story, then look no further than this excerpt from a piece by Andrea Boyack (Washburn) and Robert Berger (Kansas Bankruptcy Judge):

After receiving notice from JP Morgan Chase in 2008 that foreclosure was imminent, homeowner Joseph Keller vacated his home, moved to a new residence, and tried to pick up the pieces and start again. Two years after he had relocated, however, the county sued Keller because his house, “already picked clean by scavengers,” was in violation of the housing code. Upon returning to investigate, Keller found his former home “in [] shambles,” with “hanging gutters and collapsed garage.” Keller also discovered that he owed back taxes, sewer fees, as well as bills for municipal weed and waste removal. Furthermore, he remained personally liable on the Chase mortgage loan, the debt having grown from $62,000 to $84,000 because of two years of unpaid interest, penalties, and fees. Adding insult to injury, the Social Security Administration rejected his disability application because the vacant, crumbling home he still unwittingly owned was a valuable “asset.” Chase had dismissed the foreclosure judgment two months after Kelley had moved out, but somehow Kelley was never informed. (citations omitted).

And the zombie mortgage problem isn't just something that's bad for homeowners. Abandoned property of this kind has a huge impact that reaches far beyond lot lines. Stories abound of zombie mortgaged properties that fall into disrepair and become havens for crime and create public health concerns. This, in turn, has the effect of diminishing the property values of those parcels that are nearby—indeed, the whole community can sink with just a handful of scatter-site abandoned properties. And of course, where the problem is bad enough, local governments see a shrinking of property tax revenues as a result of the decline of neighborhoods where abandoned homes are located. Also, for those vacant properties in common interest communities (like a homeowners association or a condo association), the lender has no reason to pay the assessments (except for those few states which have adopted the limited super priority of the Uniform Common Interest Ownership Act). Whatever lien is imposed by the HOA for nonpayment will almost always be inferior to that of the lender's mortgage. Again, the mortgagee's interest is protected. Thus, those owners still left in the neighborhood must bear the burden of the unpaid assessments.

Naturally, social harms also follow the zombie mortgage practice. Consider, again, an excerpt from Boyack and Berger:

. . . [P]roperties subject to zombie mortgages are concentrated in low-income and minority communities. More than 57% of zombie properties are located in census tracts made up of households in the bottom 40% of income, compared to only 22.5% of zombie properties in communities where household income is in the top 40%. Statistically, if minority households compose at least 80% of a census tract, it is 18% more likely that a foreclosure in that community will end up a zombie mortgage compared with foreclosures commenced in other neighborhoods. (citations omitted).

So why is this important now, since the practice has obviously been going on for several years? Well, in the 2016 legislative session, the New York legislature passed a bill (effective December 2016) to try and address the zombie foreclosure problem. At the time the bill was passed, NY state officials estimated there were over 6,000 homes that were unoccupied and falling into disrepair.

So how does this law work? First, the legislation (known as New York’s 2016 Zombie Property and Foreclosure Prevention Act but more properly Part Q of Chapter 73 of the Laws of New York) has "mandatory" reporting requirements when it comes to informing the state about abandoned homes. Second, the law requires mortgage lenders (servicers to be precise) to maintain vacant and abandoned properties (something that previously was only required when the bank actually became the owner of the property). The trigger for the shift in the obligation to maintain the property comes when the lender has “a reasonable basis to  believe that the residential real property is vacant and abandoned . . . and is not otherwise restricted from accessing the property.” If the lender fails to maintain the property, the government can impose a civil penalty of $500 per violation, per day, per abandoned property.

For lenders, the law gives them an expedited foreclosure process if there is a good faith showing that the property has been abandoned. Importantly, the new act mandates that the foreclosing lender must proceed to the foreclosure sale within 90 days of obtaining a foreclosure judgment. If the lender itself purchases the property at the auction, then it must ensure that the home becomes reoccupied within 180 days of the date of acquisition. Lastly, the legislature gave the governor $100 million to be used to help low- to moderate-income individuals purchase and make repairs to these abandoned properties.

So now that we’re one year in (well, a little less), how is the law working? Evidently there are some practical/enforcement problems, as recently reported by the National Mortgage News and other outlets. First, reporting requirements (although mandatory) are not easy to enforce. The law leaves it up to lenders and local governments to report homes that are abandoned or vacant—which can be spotty and unreliable. Also, despite the penalities, the New York Department of Financial Services (the body that is not necessarily charged with enforcement of the law but that has taken up the mantle) reports that no penalties have been assessed since the law took effect. Although the NY deparment reports that banks and their servicers are broadly complying, state officials admit that they do not send inspectors to the properties to assess the situation themselves. And some local officials, like the mayor of Lackawanna, NY, says that not all banks are complying with the law. He noted this past May 2017 that "[t]his is bringing down our neighborhood, not just Lackawanna, not just Western New York but all of New York State by having banks being absent in their obligations in what they're supposed to be doing."

Also, unfortunately the abandoned home registry is not public. State officials say that doing so would make it a target for “squatters and criminal activity.” I’m a bit incredulous about that claim, since I can’t imagine many squatters and/or everyday criminals being sophisticated enough to go check out the Department of Financial Services’ website and find its registry database (or even know about it) and then go through the process of finding the ideal abandoned home for their purposes. Like the CFPB’s complaint database, making this registry public could help researchers and academics in empirically studying the zombie foreclosure issue more closely.

Lastly, NY state officials hope to help local governments build the capacity necessary to enforce this law themselves (an additional task that most municipalities will likely find difficult to pay for without funding from the state or another source).

Here at the #PropertyLawProfBlog, we’ll keep an eye on how this law continues to be rolled out in New York (as well as what other states might be doing to address the zombie foreclosure phenomenon). For now, over and out!

Illegal Property Tax Foreclosures in Detroit

Check out this really fascinating (and disturbing) article about research conducted by Bernadette Athene (Chicago-Kent, currently visiting at Chicago) on illegal property tax foreclosures in Detroit:

This week was the 11th anniversary of Hurricane Katrina.  Over the years, many have said that Detroit is experiencing a hurricane without water.

Like with Katrina, the property tax foreclosure crisis in Detroit has wiped out entire neighborhoods inhabited by poor and working-class black people. From 2011-15, the Wayne County treasurer foreclosed upon approximately one in four Detroit properties for nonpayment of property taxes.

In fact, Detroit has one of the highest number of property tax foreclosures any American city has had since the Great Depression. Most important, once foreclosed properties are vacated, they are often vandalized, burned down or stripped of all valuable materials, creating a flood of blighted properties that decimate communities by reducing property values, attracting crime and causing those who can to evacuate.

There is a debate about the origins of Detroit’s property tax foreclosure crisis.

Popular narratives have focused on a culture of lawlessness in which property owners have cheated the city by not paying their property taxes and then devising ways to avoid foreclosure.

Some have welcomed the record number of property tax foreclosures as a sign that Detroit, at long last, is establishing law and order. But, I recently co-authored a study titled “Stategraft” that demonstrates that Detroit’s unprecedented property tax foreclosure rate is indefensible because property tax assessments in Detroit are, in fact, illegal.  

Michigan’s  Constitution clearly decrees that a property’s assessed value cannot exceed 50% of its market value. In our study, we find that Detroit’s assessor is flagrantly violating this vital state constitutional provision. Consequently, contrary to popular narratives, it is the city that is stealing from Detroit property owners through illegal assessments and inflated property tax bills, and not the other way around. And while the city has reassessed properties during the last two years, those actions have not been enough to bring most assessments in line with the Michigan Constitution. 

To investigate whether property tax assessments in Detroit are illegal, we use citywide property sales and assessment data for 2009-15. As required by Michigan case law and statute, we included only arm’s length transactions in our analysis, and we find that, in 2009, 65.5% of the properties sold violated the state constitutional assessment limit.  In subsequent years the numbers were equally shocking: 2010 (84.7%), 2011 (54.6%), 2012 (71.4%), 2013 (78.2%), 2014 (83.2%), 2015 (64.7%).

The property tax assessments were not only above the legal limit, but they also exceeded it by a substantial sum. For instance, in 2010, assessments were, on average, 7.3 times higher than the legal limit. In 2015, assessments were, on average, 2.1 times higher than the legal limit.

In all years studied, the illegality was most pronounced for lower-valued properties. That is, the city is more likely to assess modest homes at illegal levels than it is more expensive homes, leaving the most vulnerable homeowners drowning in injustice. 

Detroit’s mayor, Mike Duggan — a former prosecutor — acknowledged that “for years, homes across the city have been over assessed,” and tried to remedy this in 2014 and 2015 by implementing assessment decreases for most of the city, ranging from 5% to 20%.

Our study shows that illegal property tax assessments nevertheless persist for lower-valued properties despite these reductions. For example, in 2015, properties with the lowest values were, on average, assessed at 4.8 times the legal limit, while properties with the highest values were, on average, legally assessed.

Both before and after Duggan’s assessment reductions, those who can afford only modest properties have been subject to the most severe illegality and forced to endure the consequences of Detroit’s broken levees.

In July, the American Civil Liberties Union of Michigan, the NAACP Legal Defense Fund and the law firm of Covington & Burling filed a class action  alleging that the unprecedented number of property tax foreclosures in Detroit is unlawful on several counts, including the fact that the property tax assessments systematically violate the state constitution and the Fair Housing Act. The findings of "Stategraft" strongly support this claim.

The end goal of the class action is to stop all property tax foreclosures that are based upon illegal assessments. As an interim measure, the legal team recently filed a motion for a preliminary injunction that would place a moratorium on property tax foreclosures of owner-occupied properties in Detroit and throughout Wayne County.

To be sure, by reducing city revenues, a moratorium would further wound a city that has been in economic decline for decades and is desperately trying to emerge from the shadow of the largest municipal bankruptcy in our nation’s history. But, just as we do not allow homeless people in desperate need to burglarize homes, we should not allow the City of Detroit to use unlawful assessments and inflated property tax bills to steal money from Detroit property owners. Additionally, the requested moratorium is narrowly tailored so that it protects only vulnerable homeowners and not investors. 

Given the mortgage foreclosure crisis, water shutoffs and historic bankruptcy, the people of Detroit have already had to weather several devastating storms. Now that they are facing a hurricane without water, the federal government cannot leave Detroiters stranded.

Attorney General Loretta Lynch must ensure that the Housing and Civil Enforcement Section of the Department of Justice opens an official investigation, which will supplement the ongoing class action and begin to quell the tides of inequity.

Bernadette Atuahene is a visiting professor at the University of Chicago Law School and a research professor at the American Bar Foundation.

The Property of Debt

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?

New Report Released by Seattle Law Homeless Rights Project

(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)

A Look at the Latest Mortgage Foreclosure Data: On the Rise

(Source: TRACReport)

The Transactional Records Access Clearinghouse (TRAC), housed at Syracuse University, is a super helpful organization that I've used for a number of years now. The group issues TracReports that provide free monthly information on, among other things, civil litigation throughout the U.S. federal district courts. One item of interest that the group reports on deals with the number of new foreclosure filings each month. Check out this latest report:

The latest available data from the federal courts show that during March 2016 the government reported 505 new foreclosure civil filings. According to the case-by-case information analyzed by the Transactional Records Access Clearinghouse (TRAC), this number is up 12.7 percent over the previous month when the number of civil filings of this type totaled 448. The comparisons of the number of civil filings for foreclosure-related suits are based on case-by-case court records which were compiled and analyzed by TRAC (see Table 1). 

When TRAC last reported on this matter, foreclosure lawsuits had declined from a peak reached in May and June of 2012 but seemed to have bottomed out in January 2014. Indeed, as can be seen in Figure 1, the monthly count remained relatively stable from that point until about a year ago. When foreclosure civil filings for March 2016 are compared with those of the same period in the previous year, their number was up by nearly one third, or 32.7 percent. Filings for March 2016 are still substantially lower than they were for the same period five years ago however. Overall, the data show that civil filings of this type are down 25.1 percent from levels reported in March 2011.

Top Ranked Judicial Districts

Relative to population, the volume of civil matters of this type filed in federal district courts during March 2016 was 1.6 per every million persons in the United States. One year ago the relative number of filings was 1.1. Understandably, there is great variation in the per capita number of foreclosure civil filings in each of the nation's ninety-four federal judicial districts. Table 2 ranks the ten districts with the greatest number of foreclosure lawsuits filed per one million population during March 2016.

• The District of Nevada — with 15.9 civil filings as compared with 1.6 civil filings per one million people in the United States — was the most active through March 2016. The District of Nevada was ranked first a year ago, while it was ranked fourth five years ago.

• The District of Rhode Island ranked second and also ranked second a year ago.

• The Southern District of Illinois now ranks third.

Recent entries to the top 10 list were Vermont, the Northern District of Georgia (Atlanta) and the Western District of Kentucky (Louisville), which are ranked seventh, eighth and sixth, respectively. 

The federal judicial district which showed the greatest growth in the rate of foreclosure civil filings compared to one year ago — up 700 percent — was the Western District of Kentucky. Compared to five years ago, the district with the largest growth — 239 percent — was the Northern District of Florida.

Odinet on the Fannie Mae/Freddie Mac Mortgage Contract

Chris Odinet (Southern) has posted The Unfinished Business of Dodd-Frank: Reforming the Mortgage Contract (SMU Law Review) on SSRN.  Here's the abstract:

The standard residential mortgage contract is due for a reappraisal. The goals of Dodd-Frank and the CFPB are geared toward creating better stability in the residential mortgage market, in part, by mandating more robust underwriting. This is achieved chiefly through the ability-to-repay rules and the “qualified mortgage” safe harbor, which call for very conservative underwriting criteria to be applied to new mortgage loans. And lenders are whole-heartedly embracing these criteria in their loan originations — in the fourth quarter of 2015 over 98% of all new residential loans were qualified mortgages, thus resulting in a new wave of credit-worthy homeowners that are less likely than ever before to default. As a result of this and other factors, the standard form residential mortgage contract, with its harsh terms and overreaching provisions, should be reformed. This is necessary not only due to the fact that such terms should no longer be needed since borrowers are better financially positioned than in the past, but also because of a disturbing trend in the past few years where lenders and their third party contractors have abused the powers accorded to them by the mortgage contract — mostly through break-in style foreclosures. This Article argues for a reformation of the Fannie Mae/Freddie Mac standard residential mortgage contract and specifically singles out three common provisions that are ripe for modification or outright removal.

Housing in a Time of Expanding Crisis @USFLaw

 

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.

Remembering the Fair Housing Struggle on MLK Day

 

It's fitting that on MLK Day we remember Dr. King's property law legacy. Last year topics related to fair housing and access to mortgage credit filled the headlines (from the Inclusive Communities case to continuing issues of access to credit for blacks, Hispanics, and other underrepresented groups). As we enter 2016, let us all be mindful of Dr. King's words: 

"Let us therefore continue our triumphant march . . . until every ghetto or social and economic depression dissolves, and [we] live side by side in decent, safe, and sanitary housing."

Dr. Martin Luther King, Jr.
March 25, 1965
Montgomery, Alabama

Nationalization and De-Nationalization in the Mortgage Industry

Back in 1938, the Roosevelt Administration, in order to save the housing finance industry, created a federal agency called the Federal National Mortgage Association.  The FNMA got banks lending to home buyers by agreeing to purchase the loans from the banks, so long as the loans met certain quality standards.

It was a smashing success!  The banks made high quality loans to borrowers (20% down payment, fixed rate, roughly 30% debt-to-income ratio), then sold the loans on the secondary market to the FNMA, and housing boomed.  By the 1960s, the FNMA owned about 80% of all the home loans in the United States.

But wait!  The federal government owned about 80% of all private home loans in the United States?  Wasn't that a little, well . . . socialist?  Couldn't private industry do it instead?  Yes, indeed.  So in 1968 the federal government did something unprecedented: it privatized an entire federal agency.  The agency became Fannie Mae, with a public offering and everything.  In return for certain tax advantages, it had certain obligations to the federal government, but it was a private entity.  And soon it was competing with other private entities purchasing loans on the secondary market, all of whom were securitizing those loans and selling the securties --  mortgage-backed securities.  Those entities were competing for loans, so they couldn't be too picky about quality any more. 

Fast forward to 2008.  Remember that old LendingTree ad, "When Banks Compete, You Win!"?  We all found out that was true -- so long as by "win" we meant "live in economically disastrous times."

Suddenly, things were a lot like 1937 again: the housing finance industry was dead.  Banks weren't lending -- it was too risky, since borrowers couldn't repay their loans and third parties wouldn't buy mortgage-backed securities.  How could the industry be revived?

Fannie Mae, on the verge of failure, was re-nationalized.  Quality standards were imposed, mortgages were acquired and re-financed with an assist from the federal government, and banks could make loans and sell them to Fannie Mae.  Extremely slowly, haltingly, the housing finance industry began to revive. 

Back in 2008, I predicted this would happen.  It didn't take a genius, that's for sure.  As I wrote back back then (Nationalization, De-Nationalization, Re-Nationalization), we have a history of nationalizing, de-nationalizing and re-nationalizing lending in the United States.  We tend to nationalize in a crisis, ending the crisis, then de-nationalize because of our ideological preference for a laissez-faire market system . . . which leads eventually to a crisis . . . repeat.

All that had to happen in 2008 was that history needed to repeat itself, and that was the path of least resistance.  But, it also seemed likely that, if it worked -- if the re-nationalized Fannie Mae got the housing finance industry stabilized -- then it wouldn't be long before someone realized that the federal government owned a huge protion of the home loans in the United States and that would seem a little, well . . . socialist.  Therefore, as soon as the program was successful, people would want to get rid of it.

The superb news site ProPublica, as part of its series on the housing crisis, is running a very interesting article entitled, We’ve Nationalized the Home Mortgage Market. Now What?  It makes the point that suddenly things look alot like 1968 again: 9 out of 10 home loans in the U.S. today are backed by the federal government through Fannie Mae.  The chart below, from the article, shows the percentage of home loans backed by the federal government.

What happens next?  Well, if history is any guide, the cycle will continue.  We will de-nationalize the industry, until the next crisis; then we will re-nationalize the industry to solve the crisis; then we will wonder why an industry that could be private is nationalized, so we will de-nationalize it . . . etc. etc.

Mark A. Edwards

 

 

 

 

A Stunning Map of How Foreclosures Ate America

This chart is courtesy of Atlantic Wire.

Tanya Marsh

Does the Dukeminier & Krier Get the Mortgage Crisis Wrong?

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

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

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

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

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

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

Rebecca Tushnet

Keep a Very Close Eye on the Foreclosure Fraud Settlement

It seems as though every day for weeks now we've been told a settlement between state attorneys general and fraudulent foreclosers -- by which I mean the largest home mortgage lenders in the country -- is imminent.  The banks appear to be balking because they expected the type of suit filed by New York Attorney General Eric Schneiderman to be prohibited under the settlement -- but since Schneiderman is one of the key players in the settlement talks, there seems to have either been a serious misunderstanding or a serious play for leverage by Schneiderman.  For an excellent analysis of the negotiations, and of the foreclosure crisis generally, I can't recommend Yves Smith's blog Naked Capitalism highly enough.

One issue that MUST be non-negotiable is the ability of people who were wrongfully foreclosed upon to maintain civil suits against their foreclosers.  There is no indication that such suits will be barred under the settlement, but since the negotiations are not transparent we can't know until the settlement is announced.  My first year property students have now spent weeks studying the crisis -- in part because I'm hoping to ready these young lawyers-to-be to take up the fight to ensure that foreclosure fraud doesn't pay and that its victims receive restitution.  But if the state attorneys general negotiate away the only avenue victims of wrongful foreclosure have for relief, it will be the final injustice in a long, long line of them in this crisis.  Not to mention a defeat for the rule of law.

For a very good discussion of how we should assess the settlement, when it is finally arrived at and released to public scrutiny, see this article by Richard Eskow.

Mark A. Edwards

A Housing Rebound? Well....

Is the residential housing market improving?  That's a difficult question to get a straight answer to.  Last month, the National Association of Realtors announced that it had double-counted some home sales since January 2007, and revised five years worth of sales numbers, reflecting a much weaker market than previously understood.

A New York Times article also demonstrates that we need to be cautious in taking national statistics, or even state and regional-level statistics, at face value.  For example, a new report indicates that home sales in New Jersey picked up in the latter part of 2011, with increases in contracts signed in six of the seven months between May and November.  However, the report also reveals "A great division in market fortunes between northern and southern Jersey — and urbanized areas close to Manhattan and more rural regions..." For example:

"Salem County, rich in historic houses and farmland but short on well-paying jobs or a quick commute to an urban center, has the largest inventory of all 21 counties surveyed: 44.5 months’ worth of houses, the preponderance of them priced under $400,000." 

“Simply put,” said Dawn Rapa, a Coldwell Banker Elite agent working in rural Salem County, “the only people I’ve seen selling their houses recently are those who absolutely had to — because they were in financial disarray, a job change, divorce or death.”

In my work on the commercial real estate market, I've noted that a few large markets, such as New York City, Washington, D.C., and San Francisco, distort national and regional statistics for two reasons:  (1) those real estate markets are largely immune to severe or long-term economic downturns because of there is still more demand than supply; and (2) property values are significantly higher in those markets than in the remainder of the country.  In other words, Class A commercial real estate in New York has remained strong through the financial crisis.  Those high-value transactions mask continued weakness in cheaper Class B and C assets, and make the commercial real estate market look more vibrant than it really is.  Although I haven't taken a close look at the residential real estate statistics, it appears that the same distortions may be taking place.

Tanya Marsh

Renting vs. Buying

The housing market remains in flux (to put it mildly), and many people who could afford to and have sufficient credit to purchase a house or condo are wondering if renting might be a better idea.  Answering that question depends upon a number of variables, including the local real estate submarket and the economics of the properties under consideration.  The New York Times has a tool that allows you to crunch the numbers and determine whether it is better to rent or buy a particular property.  It tells me that the townhouse I'm currently renting would only be better to buy if I stay there 13 years, even if I assume a mortgage rate of 4%. 

Tanya Marsh

Delaware sues MERS

On October 27th, Delaware Attorney General Beau Biden filed a verified complaint asserting that MERSCORP, Inc., a Delaware corporation, has repeatedly violated the state's Deceptive Trade Practices Act.  Delaware asserts that MERS's deceptive trade practices fall into three main categories:

1.  Through its opaque registry of mortgages and assignments, MERS knowingly obscures important information from borrowers.  This harms consumers because many borrowers do not know the true identity of the holder of their mortgage, which impairs their ability to raise defenses in a foreclosure action.  It also makes it more difficult for borrowers to identify their lender to seek a modification.

2.  MERS often acts as an agent without authority from its proper principal, in part because it "often" does not know the identity of its property principal.

3.  "MERS is effectively a 'front' organization that has created a systemically important mortgage registry but fails to properly oversee that registry or enforce its own rules on its members that participate in the registry."  The de-centralized structure of MERS has contributed to the robo-signing scandal and similar systemic breakdowns.

I have written about MERS before and am not a fan.  You can download a copy of the Delaware complaint, an explanatory press release, and obtain other information at the Delaware Attorney General's website.

Tanya Marsh

Federal Government Overhauls HARP

The Federal Housing Finance Authority (FHFA) today announced that it is overhauling the Home Affordable Refinance Program (HARP) in order to make it accessible to more Americans.  HARP allows homeowners who are current on their existing mortgages, but "underwater" (meaning that their loans exceed the value of their homes) to refinance and take advantage of historically low interest rates.  A homeowner who has a loan at 7%, for example, could refinance around 4%, saving hundreds of dollars per month in interest. 

HARP only applies to mortgages owned or guaranteed by Fannie Mae and Freddie Mac.  It only applies to loans where the borrowers are current on their obligations.  Still, the modified program announced today could benefit many homeowners by (1) reducing or eliminating refinancing fees; (2) removing the 125% loan-to-value ratio ceiling for fixed-rate mortgages backed by Fannie and Freddie; (3) eliminating the requirement of an updated appraisal; and (4) extending HARP to December 13, 2013.

HARP has been around since April 2009, but fewer than 900,000 households have taken advantage of the program.  However, based on data provided by FHFA, HARP refinancings have provided the bulk of refinancings in the past two years.  Hopefully, this modified program will help underwater homeowners take advantage of low mortgage rates.

You can read about the program in the press release, in the New York TImes, and in the Wall Street Journal.  (By the way, if you only read one of these -- the WSJ article is the most thorough.)

Although I think that this expansion of HARP is a positive move, it will do little to address the most significant problem facing the residential real estate market.  We (the homeowners of America) remain massively overleveraged.  The residential market and the broader economy cannot recover until a significant deleverage takes place.  Unfortunately, neither the administration nor any of the GOP candidates have proposed a plan that will allow this deleveraging to take place in an orderly fashion.  Our default (pun alert) deleveraging strategy is thus bankruptcy and foreclosure. HARP will help many homeowners make their monthly payments, but lowering interest rates (and presumably adding to the principal through closing costs) will do nothing to help homeowners deleverage.

Just another cheery observation for your Monday afternoon.

Tanya Marsh

Causes of the Financial Crisis

I'm teaching a course on the Financial Crisis this semester.  We have been examining various explanations of the "cause" of the Financial Crisis.  Freakonomics has a great piece by James Altucher that sums up much of our discussion.

Tanya Marsh

FHFA to file suit against the big banks

This week has been good news/bad news for Bank of America.  Good news -- Warren Buffet invested $5 billion in new preferred shares, and gave investors a confidence boost in the bank.  Bad news -- the New York Times reports this morning that the Federal Housing Finance Agency (FHFA), the "conservator" agency over Fannie Mae and Freddie Mac, is preparing to file a lawsuit against Bank of America, JP Morgan Chase, Goldman Sachs, Deustche Bank, and others, alleging that the due diligence that they conducted on residential mortgages prior to securitizing and selling them, violated federal securities law.  This is, of course, in addition to the actions of the 50 state attorneys general, the $10 billion lawsuit by AIG against Bank of America, and the lawsuits by various private investors.

In other words, this is the perfect semester for me to be teaching my seminar on the Financial Crisis. 

Tanya Marsh

When $625,500 Doesn't Cut It

The New York Times explores how new limits on federally guaranteed mortgages will have a disparate impact on the housing market in big cities:

On Oct. 1, when the limit on federally guaranteed loans drops to $625,500 from the current level of $729,750, hundreds of buyers in the city and nearby suburbs will either have to come up with larger down payments to stay under the new limit or face the prospect of applying for jumbo loans — anything above $625,500 — which have higher interest rates.   . . .  “Across the country this is not a big deal,” said David Maundrell, the president of aptsandlofts.com “but in New York, because our prices are where they are, it’s going to be an issue.”

Steve Clowney

Ghost Estates in Ireland

I admit that when I first read the title of this photo essay in the New York Times, I thought that it was about haunted houses.  But sadly, it is a haunting reminder that the housing bubble was not just an American phenomenon.  Although the architecture of the homes depicted in Valérie Anex's photo essay are uniquely Irish, the vibe is similar to the Guardian's photo essay "Detroit in Ruins," which we linked to earlier this year.

On a related note, also in today's New York Times, an editorial reminding us that despite the fact that American mortgage interest rates are at an all time low (as Steve posted this morning), millions of homeowners are still underwater on their mortgages.  The editorial advises us that "Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans."  More on this editorial later (if I make some progress on my class prep).

Tanya Marsh