«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
This article questions the wisdom of this impairment of contract because of the way fundamental aspects of the rule of law are undermined. Private parties cannot rely on the certainty and enforceability of lawful loan provisions that prescribe the private parties’ division of duties and risks. As a consequence, confidence in the legal system will suffer. Without an adjudication of fault, local government bases the enactment on raw legislative fiat, not justice. Another issue involves the lack of clarity due to vague terms, which leaves the lender to guess at the meaning of the mandates and the timing of its compliance obligations. These ordinances must be tested for their vagueness. What is worse is that despite the borrower’s voluntary commitment to personally maintain and keep secure the property, abandoned property ordinances encourage the borrower’s irresponsibility by effectively releasing him from his loan obligations and the public nuisance regulatory scheme. If you are the borrower, what’s not to like about such an ordinance? Nothing! Meanwhile, mortgage loan costs are sure to increase and are sure to be passed on to future borrowers. Moreover, it remains to be seen whether mortgage lenders will be able to recover some of
the expenses and fees they incur while complying with abandoned property ordinances.
TABLE OF CONTENTSI. Introduction
III. The Chula Vista Abandoned Residential Property Ordinance (CVAPO)
1. Inspection and Registration
2. Maintenance and Security
4. Purpose and Means
The Classification of the CVAPO and Its Validity...... 364 B.
1. General Validity of Land Use Regulation
2. The Validity of the CVAPO as a Regulation to Eliminate Blight
3. The Validity of the CVAPO as a Public Nuisance Regulation
a. A Public Nuisance Hybrid Regulation
b. A Public Nuisance Hybrid Regulation That Rewrites a Contract
c. A Public Nuisance Hybrid Regulation without Factual Support
4. The Validity of the CVAPO as a Land Use Regulation That Impairs Contracts
Are Abandoned Property Ordinances Void for C.
Are Abandoned Property Ordinances Fair and D.
IV. The CVAPO and the Nonjudicial Foreclosure
California’s Nonjudicial Foreclosure Statutory B.
1. Basic Foreclosure Law in California
2. Lender’s Credit Bid Includes Loan Principal Balance, Interest, Fees, and Costs
3. Lender’s Advances and Other Costs
4. The Underlying Purpose of Lender’s Advances and Other Costs
5. Foreclosure, the CVAPO, and Miscellaneous Issues.. 405 a. Lender’s Entry onto Borrower’s Property
b. Lender’s Fees and Costs are Unreasonable................. 407 c. Advances by a Junior Lender to a Senior Lender....... 407 2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 347 V. Recommendations
INTRODUCTIONA lot of attention has been given to the decline in real property prices that began in 2006 and the subsequent tidal wave of foreclosures, both of which were central to the catastrophic financial crisis in the U.S. economy.1 With borrowers, lenders, Wall Street, and government-sponsored enterprises receiving one form of bailout or another, the group that has taken the biggest wallop has been the U.S. taxpayer.2 A majority of officials, media, commentators, and the public blame mortgage lenders and Wall Street. It is not surprising that federal, state, and local governmental bodies rushed to “solve” the problems of the Great Recession by imposing more regulations on lenders.3 Too little has been said about how the federal government laid the foundation for the crisis through its policies and regulations, and through the pressure it applied against the mortgage lending industry.
As the crisis developed, the nation watched prices fall and defaults and foreclosures rise. The overwhelming majority of the foreclosures were the result of monetary defaults.4 The foreclosure fallout was exacerbated because of the dramatic decrease in housing prices, which left many borrowers with loans in excess of the property values, and a record number of foreclosures ensued.5 Many borrowers purchased homes with a variety of different (and sometimes misleading) loan products, but these borrowers should never have been approved for home loans in the first place. Many of these borrowers qualified with no or inadequate verification of ability to pay and yet obtained loans to purchase homes they later lost in foreclosure.6 * Michael M. Sandez is an Assistant Professor of Law at Liberty University School of Law; J.D., University of San Diego School of Law, 1983. Mr. Sandez was in private practice for 17 years before he began to teach law. During his practice, Mr. Sandez handled civil transactional and litigation matters, primarily concentrating on real property matters, including title insurance policy analysis, claims, and litigation, real estate broker errors and omissions insurance policy analysis, claims, and litigation, mortgage broker claims and litigation, and many other assorted real property matters. The author extends his gratitude to his research assistants for this article, Mr. Jeremy Roe, Mr. Benjamin Kontaxes, Mr. Yasha Renner, and Mr. Charles Helm, for their excellent and valuable work.
1 THOMAS SOWELL, THE HOUSING BOOM AND BUST, 58–60 (Basic Books rev. ed. 2010) [hereinafter SOWELL].
2 GRETCHEN MORGENSON & JOSHUA ROSNER, RECKLESS ENDANGERMENT: HOW OUTSIZEDAMBITION, GREED, AND CORRUPTION LED TO ECONOMIC ARMAGEDDON 40–42, 302–03 (2011) [hereinafter MORGENSON & ROSNER].
3 See id. at 110.
4 See, e.g., SOWELL, supra note 1, at 26, 62, 67.
5 Id. at 61–63, 65.
6 See SOWELL, supra note 1, at 18; MORGENSON & ROSNER, supra note 2, at 283, 287; see also discussion infra Part II.
Other borrowers were unable to pay the higher interest rates when their mortgage rates adjusted upwards.7 The policy of home ownership for verylow- to moderate-income families and minorities stems from government intervention in the market, beginning with the Community Reinvestment Act of 1977.8 Additional federal legislation and regulation that entrenched and advanced the policy soon followed, as well as Fannie Mae’s and Freddie Mac’s participation in the real estate mortgage market through guarantees of loans and the purchase and sale of mortgages in the secondary market. The federal government, its agencies, government-sponsored enterprises, and certain community organizations were insistent on increasing the number of homeowners, whether or not they were qualified to purchase the home under traditional loan underwriting standards.9 Other borrowers defaulted on their payments because they lost their jobs due to the downturn in the economy and found it difficult to save their homes in a real estate market in tatters.
In 2007, the consequences of ill-advised public policy, dubious loan products, sharp loan practices, nonexistent or sloppy verification of borrowers’ loan qualifications, and misinformation or misrepresentation by borrowers began to unfold. In response, the City of Chula Vista, a suburb of San Diego, California, enacted an ordinance that is becoming popular across the country.10 Essentially, Chula Vista’s Abandoned Residential Property Registration Ordinance (CVAPO) changes the agreement made by mortgage lenders and borrowers regarding the maintenance and security of the real property that is the collateral for the loan.11 Aside from loan payments, the typical loan terms obligate the borrower to occupy the property (at least for a specified period),12 and to maintain, and not to commit waste at the property.13 The Chula Vista City Council, through legislative fiat, eliminated the lenders’ contractual right to exercise their own discretion14 as to whether they would enter the property to maintain and secure the property. Thus, lenders—despite their lack of ownership and possessory rights— are now mandated to advance monies to maintain the property when, under the circumstances of particular loans, they might not otherwise do so.15 Notwithstanding the fact that the lenders’ extension of credit provided an 7 SOWELL, supra note 1, at 18–21, 29.
8 Community Reinvestment Act of 1977, § 802 et seq., as amended, 12 U.S.C. § 2901 et seq.
9 See infra Part II.
10 Benton C. Martin, Vacant Property Registration Ordinances, 39 REAL EST. L.J. 6, 19 (2010).
11 See infra Part III.
12 California-Single Family-Fannie Mae/Freddie Mac Uniform Instrument, Form 3005 01/01 § 6.
13 Id. at § 7.
14 CHULA VISTA, CAL., MUN. CODE § 15.60.040 1.
15 CHULA VISTA, CAL., MUN. CODE § 15.60.040; see also Neighborhoods: The Blameless Victims of the Sub-Prime Mortgage Crisis: Hearing Before the House Subcommittee on Domestic Policy, 110th Cong. 101 (2008) (statement of Doug Leeper, Code Enforcement Manager for City of Chula Vista) [hereinafter Testimony of D. Leeper].
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 349 opportunity for borrowers to purchase homes, if the lenders fail to comply with the CVAPO, they face fines and the possibility of criminal misdemeanor prosecution and imprisonment.16 Other municipalities and counties across the country have enacted identical or similar regulations.17 This article, thus, critiques the CVAPO because it has become a model for many other regulations throughout the state of California and the country.18 Part II briefly reviews the historical background that led to the subprime mortgage fiasco.19 The focus of Part II is on the government policy to expand home ownership among the low- to moderate-income and minority communities, and the use of the home mortgage lending industry to implement the policy from the late 1970’s to as recent as a few years before the mortgage meltdown. Given the magnitude of the Great Recession,20 the CVAPO (and all others like it) must be considered in the context within which it was promulgated because it retains some of the same thinking found in the policy that led to the crisis. Just as lenders have been the government’s vehicle to carry the home ownership policy forward, lenders are the abandoned property legislation’s vehicle to carry the borrowers’ contractual duty to maintain the collateral property. Lenders are seen as the industry obligated to mitigate the consequences of the financial crisis.21 Though this specific type of ordinance22 was first enacted in 2007 in response to the looming financial crisis, the core causes of the Great Recession were laid long before.23 The historical context makes the critical point that government exercised poor judgment in the creation of a public policy that increased homeownership with little to no concern for the home purchaser’s ability to pay, and implemented that policy through legislation, 16 CHULA VISTA, CAL., MUN. CODE § 15.60.090. “Violations of this chapter may be enforced in any combination as allowed in Chapters 1.20, 1.30, and 1.41 CVMC.” Fines can be up to $1,000 per violation per day; imprisonment can be for up to six months. See also infra notes 71–74 and related text.
17 See SAFEGUARD PROPERTIES, http://www.safeguardproperties.com/Resources/Code_Enforcement_Contacts.aspx (last visited July 1, 2013) (listing on excel spreadsheet code enforcement officers of local governments throughout the country). For a list of local governments that in May 2008 were interested in or were pursuing abandoned property ordinances, see Testimony of D. Leeper, supra note 15, at 103, 115; see, e.g., FT.
LAUDERDALE, FLA., MUN. CODE §§ 18-12.1 to 18-12.5; LAS VEGAS, NEV., MUN. CODE §§ 16.33.010– 16.33.090.
18 For this reason, California case law and statutes will be referenced in the discussion of the various issues.
19 The historical background is brief but provides a context that may explain in part the push by local governments across the country to enact some version of vacant property ordinances.
20 Some courts have taken to using the phrase “Great Recession” when referring to the financial collapse of 2007–2009. See, e.g., In re Smith, 435 B.R. 637, 643 (B.A.P. 9th Cir. 2010).
21 See generally Lea Deutsch, Collateral Damage: Mitigating the Effects of Foreclosure in Communities, 22 TEMP. POL. & CIV. RTS. L. REV. 203, 214–17 (2012).
22 The CVAPO has been called the “Chula Vista Model.” Martin, supra note 10, at 11.
23 See infra Part III.
regulation, and litigation that distorted the housing and lending markets to such an extent that it led to boom and bust cycles that devastated the national economy. One lesson that should be taken from the financial fiasco is that government ought to terminate the policy immediately and extricate itself in certain respects from the housing mortgage market.24 Part III of this article provides a general description of the CVAPO’s provisions and purpose and then examines whether the CVAPO satisfies constitutional standards. As explained in this part, the CVAPO works against the rule of law. If courts uphold abandoned property ordinances, their decisions will further entrench government’s minimalist view of property rights, which already have receded extensively under court rulings.