«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 ...»
The CVAPO undermines the rule of law because local government’s police power is expanded so it can impair private contracts and interfere with property rights without the accountability check of findings based on substantial empirical data that blight actually existed at the time of enactment.25 The rule of law is weakened because an abandoned property ordinance exceeds valid police power authority in that the means to achieve the objective of public health and safety belie the core purpose of government, which is to wield its authority against wrongdoers. An abandoned property ordinance does not adjudicate wrongdoing; it does not concern itself with the finding of fault between a lender and a borrower. Instead, such an ordinance makes an economic choice that contradicts a requisite of the rule of law: the private parties’ reliance on the certainty and enforceability of a lawful contract. Further, the ordinance rewrites a private contract. That is, the parties’ lawful division of rights, duties, and risks is reversed so that a borrower is released from a significant contractual maintenance obligation and a lender becomes obligated, making public nuisance regulations superfluous in those instances when a borrower has defaulted on his mortgage loan and abandoned his property.26 As a consequence, borrowers are encouraged to ignore their contractual and civic obligations regarding the property.
The rule of law is diminished because an abandoned property ordinance that is vague does not sufficiently define when a mortgage lender that has recorded a notice of default must start to maintain that property after the borrower abandons it. Nor does such an ordinance adequately define what the standard for maintenance is, once the lender begins that task. The ambiguity forces the lender to guess at definitions, making it vulnerable to a fine or prosecution.27 24 Obviously, government must remain involved in the regulation and prosecution of such things
The rule of law is defeated because an abandoned property ordinance is unfair and inequitable. Since fault is irrelevant, abandoned property ordinances disregard borrowers’ default and abandonment. An ordinance of this type achieves its goal by creating a greater financial burden on lenders when local government should instead place the mandate to maintain and keep secure the property on the defaulting borrowers. Local officials have enacted an ordinance that is unfair because mortgage lenders are now exposed to the risk of claims by borrowers in addition to the risks of fines and prosecution under the ordinance.28 Part IV examines the CVAPO in relation to some issues that arise in the context of California’s nonjudicial foreclosure law. Part V offers recommendations and, finally, Part VI concludes the article.
So how did the subprime mortgage crisis come about? Government officials, the media, and the public in general primarily point to the lending industry and the financial sector as the cause of the financial crisis and the Great Recession. This opinion is so widespread that even international leaders are critical of the U.S. lending industry. José Manuel Barroso, the current President of the European Commission, identified the North American financial markets as the cause of the European financial crisis when, with diplomatic finesse, he stated, “This [European financial] crisis was not originated in Europe. [T]his crisis originated in North America, and many of our financial sectors were contaminated by, how can I put it, unorthodox practices from some sectors of the financial market.”29 Whether there was a direct causal link or not, European leaders such as Mr. Barroso are convinced that the financial crisis in Europe was caused not by the monetary policies and entitlement-program spending in Europe, but by the financial sector and the subprime mortgage fallout in the United States. Domestically, retired Congressman Barney Frank, the former Chairman of the House of Representatives’ Committee on Financial Services who shielded the government-sponsored enterprises for years, stated that “[w]e are in a 28 See infra Part III.D.
29 Council of the European Union, Joint Press Briefing: Van Rompuy & Barroso (Q&A) (June 18, 2012), http://tvnewsroom.consilium.europa.eu/event/g20-summit-june-2012/joint-press-briefing-vanrompuy-barroso-qa111/P12 (Pres. Barroso’s response to a journalist’s question at the G-20 Summit in Cabo San Lucas, Baja California, Mexico in June 2012); see also Barroso: EU Needs No Economic ‘Lessons,’ UPI (June 19, 2012), http://www.upi.com/Top_News/World-News/2012/06/19/Barroso-EUneeds-no-economic-lessons/UPI-48321340092800/. While there certainly was a negative international economic impact as a result of the U.S. recession, see, e.g., SOWELL, supra note 1, at 64, the blame for it does not solely rest with the U.S. financial sector. See id. at 138–47, 179–82.
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worldwide crisis now because of excessive deregulation” and “mortgages made and sold in the unregulated sector led to the crisis.”30 The financial sector in the United States certainly had a significant role in the financial fiasco. Blame indeed can be laid at the feet of some frontline bank loan officers and mortgage brokers, but more specifically at the doors where corporate directives were set by some prime and subprime mortgage lenders, government-sponsored enterprises Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), investment bankers on Wall Street, and financial rating agencies.31 The traditional real property mortgage financing market, with its longstanding stringent qualification criteria for borrowers, was abandoned.32 Abuse or illegality by all actors became acceptable behavior. There is no doubt that there were individual persons and entities within the financial sector (from Main Street to Wall Street) and policy makers in Washington, D.C., that would be subject to liability if regulations already in place were enforced. To be sure, the financial sector and Wall Street contributed enormously to the subprime mortgage crisis, as well.33 Countrywide, NovaStar and Fremont are three examples of the many lenders that exploited the easy-money opportunity created by the Federal Reserve Bank’s low interest rates and the easy borrower approval demanded by the federal government’s policy of more home ownership within low-income and minority communities.34 This article will not recount all the details, but 30 SOWELL, supra note 1, at 76 (citing WASH. POST, July 11, 2008, at A17).
31 Id. at 28; see also supra notes 23–24.
32 MORGENSON & ROSNER, supra note 2, at 1–7.
33 SOWELL, supra note 1, at 271–85. For example, Wall Street investment bankers did not disclose to investors the number of subprime loans or the nature of the deficiencies in those loans that went in to the pool of loans that collateralized the mortgage-backed securities.
34 A key relationship that led to the debacle involved Countrywide Financial, “an aggressive subprime mortgage lender,” and Fannie Mae. MORGENSON & ROSNER, supra note 2, at 10–11, 184–88.
In 2004, Fannie Mae purchased 26 percent of its loans from Countrywide Financial. Id. at 190. In 2005, Fannie Mae purchased $12.7 billion in subprime loans from Countrywide. Id. at 195. Countrywide Financial was known to alter borrowers’ applications in order to obtain approval of loans, engage in risky loan underwriting practices such as approval of loans that did not require documentation of borrowers’ income and assets, did not require down payments, and permitted high debt-to-income ratios.
Id. at 182, 193, 195. From the heights to the depths of the industry, Countrywide nearly went bankrupt and was then purchased by Bank of America in 2007. Id. at 199–200. NovaStar Financial, formed as a real estate investment trust, was one of the subprime mortgage lenders that, along with others, produced the growth in this industry in the 1990’s and in to the next century. Id. at 100. NovaStar engaged in sharp lending practices and accounting fraud. See id. at 201–18. “[N]ovaStar was a microcosm of the nationwide home-lending assembly line that would lead directly to the credit crisis of 2008.” Id. at 208.
It is no longer funding mortgage loans. Id. at 218. Fremont Investment & Loan obtained a line of credit from Goldman Sachs and other financiers in 2003 and rushed aggressively into the subprime mortgage loan business, primarily originating mortgage loans that used the property’s equity for cash payments to the borrowers and adjustable rate mortgage loans. Id. at 271–72. A significant portion of Fremont’s mortgages was known as “liar loans” which were expected to fail due to their material deficiencies. Id.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 353 the role of mortgage lenders and investment bankers in the creation and bursting of the housing bubble is a fascinating yet sad illustration of how the various players in the financial sector willingly participated in the mandate to carry out the federal government’s ill-advised policy.35 Despite the fact that Mr. Barroso and Congressman Frank blamed only the financial sector for the worldwide crisis, the truth is that lenders are neither the beginning nor the end of the list of culpable parties. As if they were superheroes, Congressional politicians were quick to hold hearings and blame the evil lenders and Wall Street36 and then passed more regulations that included money for loan modifications and foreclosure mitigation for borrowers.37 There probably were some gaps in the regulation matrix that needed to be filled, but it is arguable that the housing bust would not have occurred had extant regulations been enforced and government agency oversight taken place—and, had the subprime home ownership policy never been implemented. To reinforce the perspective that the financial sector caused the debacle, legislators have written new laws that in nearly all instances favor the borrower and burden the lender.38 Long before this crisis, however, government officials enacted legislation that promoted a policy of home ownership for unqualified borrowers and required lender compliance with the policy.39 This policy had far more to do with the financial fiasco40 at 287. Fremont’s sharp lending practices and defective loans led to consequences it could not resolve and it filed for bankruptcy in 2008. See id. at 290–98.
35 SOWELL, supra note 1, at 144.
36 Id. at 72–78.
37 Emergency Economic Stabilization Act, 12 U.S.C. §§ 5201–61 (2012), established the Troubled Asset Relief Program, id. §§ 5211–41. With these resources and legislation, the Making Home Affordable Program was created in an effort to combine the government mortgage assistance programs, including those of Treasury and the Department of Housing and Urban Development. See Overview, DEP’T TREASURY (last updated July 13, 2012), OF THE http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/Pages/Overview.aspx.
The Making Home Affordable Program includes the Home Affordable Modification Program (“HAMP”) and the Home Affordable Refinance Program (“HARP”). See generally View All Programs, MAKING HOME AFFORDABLE (last updated Mar. 8, 2013), http://www.makinghomeaffordable.gov/programs/view-all-programs/Pages/default.aspx (listing all programs in the Making Home Affordable Program). Mortgage loan restructuring was given special tax treatment by the Mortgage Forgiveness Debt Relief Act of 2007. 26 U.S.C. § 108(h) (Supp. I 2012).
California also created the so-called “Homeowners’ Bill of Rights.” 2012 Cal. Stat. chs. 86–87 (codified in scattered sections of CAL. CIV. CODE. § 2920–24 (West 2013)).
38 See, e.g., 2012 Cal. Stat. chs. 86–87 (California’s “Homeowners’ Bill of Rights”).
39 “It has now become evident that the regulatory pressures imposed by the government to ‘push’ lenders to extend more credit to higher-risk borrowers was simultaneously being met by Fannie Mae and Freddie Mac efforts to ‘pull’ lenders to issue more mortgages to high-risk borrowers.” Todd J. Zywicki & Joseph D. Adamson, The Law and Economics of Subprime Lending, 80 U. COLO. L. REV. 1, 37 (2009).
40 See SOWELL, supra note 1, at 72–78. Another commentator cites other causes for the financial crisis: “But the real issues of the crisis boil down to three different factors: state and local growthmanagement planning, the bond-ratings agencies, and banking reserve requirements.” RANDAL
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than many officials care to admit, and only a few reluctantly have done so.41 The fact that elected officials and their relatives received low-cost loans, jobs, and campaign contributions also “persuaded” them to support their homeownership policy and protect the government-sponsored enterprises.42 There are some scholars and commentators, with an apparent sympathy for local government, who do not discuss the root cause of the crisis.43 There are other commentators, however, whose works explain how government intervention through legislation and regulation, as well as inaction, distorted the housing and lending markets,44 or suggest self-regulation by the mortgage loan industry,45 or express concern about problems with vacant property ordinances.46 Most people would agree with a general economic environment that promotes homeownership; after all, this is what enables the “American dream.” It is critical to keep in mind that the foundation for such an environment is the freedom to make personal economic choices that are based on private preferences and to accept the responsibility that obtains with such choices. The freedom to choose is inextricably intertwined with the possibility of failure. But when government policy interferes with the housing and mortgage markets through legislation and regulation,47 it is foolish
O’TOOLE, AMERICAN NIGHTMARE: HOW GOVERNMENT UNDERMINES THE DREAM OF HOME OWNERSHIP208 (Cato Inst. 2012).
41 See MORGENSON & ROSNER, supra note 2, at 40–41, 246–47, 250–51, 256–59, 303, 305 (detailing various officials’ actions and later responses to the mortgage and lending crisis); SOWELL, supra note 1, at 48–52.
42 MORGENSON & ROSNER, supra note 2, at 68–69, 187–88; SOWELL, supra note 1, at 54.