«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 ...»
43 See, e.g., Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for the Rise in Foreclosures and Abandoned Properties, 2008 UTAH L. REV. 1169, 1169 (2008); Benton C. Martin, Vacant Property Registration Ordinances, 39 REAL EST. L.J. 1, 1 (2010); Joseph Schilling, Code Enforcement and Community Stabilization: The Forgotten First Responders to Vacant and Foreclosed Homes, 2 ALA. L. REV. 101, 101 (2009).
44 See, e.g., MORGENSON & ROSNER, supra note 2, at 31–45, 57, 77–93; SOWELL, supra note 1, at 121–26.
45 See, e.g., M. Todd Henderson, Self-Regulation for the Mortgage Industry (Coase-Sandor Inst.
for Law and Econ., Working Paper No. 638, 2013).
46 See, e.g., Richard E. Gottlieb et al., Reckless Abandon: Vacant Property Ordinances Create Legal Uncertainties, 68 BUS. LAW. 669, 669 (2013); Keith H. Hirokawa & Ira Gonzalez, Regulating Vacant Property, 42 URB. LAW 627, 637 (2010).
47 See, e.g., Community Reinvestment Act of 1977, 12 U.S.C. § 2901(b) (2012) (“encourage[ing] [financial] institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions”); Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 12 U.S.C. § 4501 (2012) (establishing Government Sponsored Enterprises’ [GSE] role in loans to low and moderate-income earners); 12 U.S.C. § 4562 (2012) (establishing goals for purchase money and refinance loans by the GSEs to very-low- and moderate-income families); American Dream Downpayment Act of 2003, Pub.L. 108-186, 117 Stat. 2685; Low and Moderate Income Housing Goal, 24 C.F.R. § 81.12(a) (“Purpose of goal. This annual goal for the purchase by each GSE of mortgages on housing for low- and moderate-income families (“the Low- and Moderate–Income Housing Goal”) is intended to achieve increased purchases by the GSEs of such 2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 355 to ignore the results of the policy after a financial crisis of the magnitude we have seen in the subprime mortgage fiasco.48 A sober examination of the policy must take place notwithstanding the desire in some quarters for government to help low- and moderate-income families and minorities.
While the inception of this subprime home ownership policy for low- and moderate-income families occurred in the late 1970s (if not earlier), the policy expanded and became reinforced through additional legislation and regulation in the 1990s.49 An obscure section of a 1991 piece of legislation is perhaps the biggest act of government market intervention that has proven to be disastrous.50 In response to the savings and loan crisis, Congress passed the Federal Deposit Insurance Corporation Improvement Act to impose tighter restrictions on lenders but also to expand government guarantees of loans.51 Commercial banks are members of the Federal Reserve Bank system and thus had the benefit of federal government assistance in a financial crisis; but under this Act, investment banks and insurance companies were given the assurance of taxpayer bailout.52 “Too big to fail” had been written into law. The tight restrictions on capital reserves and other similar requirements were later relaxed “under the guise of giving banks more flexibility or making them better able to compete in international markets.”53 Deregulation facilitated the financial sector’s capacity to fund loans for nonqualified borrowers. An assurance of pay off upon borrower default emboldened lenders to write more loans.54 Mortgage lenders, Fanmortgages.”); see also 42 U.S.C. § 12821 (2012) (Downpayment Assistance Initiative that appropriated $800 million for assistance to low-income families for housing purchase down payments during the 2004 to 2007 period).
48 MORGENSON & ROSNER, supra note 2, at 4 (“[T]he homeownership drive helped to plunge the nation into the worst economic crisis since the Great Depression.”); SOWELL, supra note 1, at 57 (“The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more ‘home ownership’ through ‘affordable housing,’ especially for low-income home buyers. These lax lending standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge.”) (emphasis in original).
49 See SOWELL, supra note 1, at 36–42. The Community Reinvestment Act of 1977 laid the foundation for all the legislation that relaxed requirements for loans to low and moderate-income borrowers and minorities. An example of a reduction in lending standards that advanced the home ownership policy occurred in 1995 when the Dept. of Housing and Urban Development relaxed the rules related to, among others, the elimination of the requirement to use appraisers who were independent of the lender. MORGENSON & ROSNER, supra note 2, at 57.
50 MORGENSON & ROSNER, supra note 2, at 40–42.
51 Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.L. 102-242, 105 Stat.
2236 (amended eleven times after enactment).
52 MORGENSON & ROSNER, supra note 2, at 40–42. Recall the taxpayer bailouts of Bear Stearns (an investment banker) and AIG (an insurance company). Id. at 148.
53 Id. at 110.
54 SOWELL, supra note 1, at 18.
nie Mae, Freddie Mac, and investment bankers on Wall Street were beneficiaries of this Act when, after they reaped the profits of their loan transactions, they received bailouts.55 The Federal Deposit Insurance Corporation Improvement Act, of course, required the taxpayer to pay the bill.
Federal government regulatory agencies and elected officials certainly felt justified in the homeownership policy for low- and moderate-income families and minorities when the Boston Federal Reserve Bank in 1996 issued the results of its study and concluded that banks had engaged in discriminatory lending practices.56 Upon later analysis, however, the study’s flaws were discovered and exposed, and the primary author conceded the data to support that contention did not exist.57 Nevertheless, government used the 1996 study to further expand the policy, even by force of litigation.58 Quotas of loans for low-income and minority borrowers were established and lenders were held accountable to regulators, to a great extent through the policing efforts of community organizations such as the Association of Community Organizations for Reform Now (ACORN).59 The policy and the crisis-driven relief, on balance, have proven to be ineffective and not helpful.60 Such a policy should not be pursued because the U.S. Constitution does not authorize government to do what it has done in the name of a so-called right to home ownership.61 The notion of taxpayFannie Mae and Freddie Mac had an implied guarantee from the U.S. Government, though retired Congressman Barney Frank denied that such a guarantee existed. MORGENSON & ROSNER, supra note 2, at 152.
56 See Alicia H. Munnell et al., Mortgage Lending in Boston, Interpreting HMDA Data, 86 AM.
ECON. REV. 25-53 (1996) (concluding that race “played a significant role in the mortgage lending decision” in the greater Boston, MA area).
57 MORGENSON & ROSNER, supra note 2, at 35–36; SOWELL, supra note 1, at 107–09.
58 See, e.g., SOWELL, supra note 1, at 18, 39. The expansion of the policy occurred under the Clinton, Bush II, and Obama administrations. One commentator expressed the view that government’s goal was not really the eradication of discrimination, but rather, [t]he real goal was to achieve a more ‘egalitarian distribution’ of housing, period. So under the phony guise of ‘fighting discrimination’ the Fed, the Congress, Fannie Mae, Freddie Mac and myriad other federal government agencies forced, bribed, and extorted mortgage lenders of all kinds into making literally trillions of dollars in bad loans to unqualified borrowers.
Thomas DiLorenzo, How Crackpot Egalitarianism Caused the Sub-Prime Mortgage Crisis, LEWROCKWELL (Oct. 18, 2008), http://www.lewrockwell.com/dilorenzo/dilorenzo154.html.
59 MORGENSON & ROSNER, supra note 2, at 22, 25, 34; SOWELL, supra note 1, at 116–18.
60 Les Christie, Borrowers in Obama housing program re-defaulting, watchdog says, CNNMONEY (July 24, 2013; 12:08 AM) http://money.cnn.com/2013/07/24/real_estate/hampdefault/index.html?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campai gn=Feed%3A+rss%2Fmoney_topstories+(Top+Stories) (last visited July 27, 2013) (“Those who have been in the program since 2009, are re-defaulting at a rate of 46%, the inspector general [Special Inspector General for the Troubled Asset Relief Program (SIGTARP)] found.”); see also Zywicki & Adamson, supra note 39, at 4 (“Without an accurate understanding of the causes of the subprime bust, regulatory measures may be counterproductive, providing bailouts for reckless lenders and speculative borrowers while resulting in higher interest rates and less credit available for legitimate borrowers.”).
61 See SOWELL, supra note 1, at 178–79.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 357 er guarantees to fund an unrealistic, utopian policy when the financial actors—big or small, individual or corporate, private or public—default on loans or pursue illegal acts to obtain or to sell loans is outrageous.62 Despite the taxpayers’ gargantuan indebtedness, the federal government continues to push the policy.63 Through an objective analysis of the data and the devastating results, one can reasonably conclude that it is time to eliminate the policy. It is also time to extricate government from the residential loan business and its sponsorship of Freddie Mac and Fannie Mae.64 Consistent with the subprime home ownership policy, government has granted a pass to borrowers for their role in the financial meltdown and has not sought to impose additional requirements on them. This is not to say that the owners, humans with dignity in their own right, were subprime, but that the government’s intervention into the housing market with a policy that intentionally ignored commonsense standards for home purchases was subprime. Instead, in the policy makers’ frame of mind the borrower is the victim, notwithstanding the significant number of “the all-popular liar loans that had so dominated the industry’s... mortgage production.”65 Government compounded the problem by enacting various forms of loan modification and foreclosure mitigation legislation at the federal and state levels.66 At the local level, city councils have enacted abandoned property ordinances of one variation or another—all of which benefit the borrower and impose greater financial burdens on lenders. Notwithstanding government officials’ belief that they have taken saintly steps to solve the problem, the irony is that the very people government wants to protect will face higher mortgage loan costs when they obtain their next loan or when new home 62 Id. at 84–87, 160–64.
63 Zachary A. Goldfarb, Obama Administration Pushes Banks To Make Home Loans To People With Weaker Credit, WASH. POST (Apr. 2, 2013), http://articles.washingtonpost.com/2013-04business/38220144_1_housing-recovery-housing-market-housing-officials/2.
64 With regard to the elimination of the federal government’s sponsorship of Freddie Mac and Fannie Mae, Representatives Scott Garrett (R-NJ) and Jeb Hensarling (R-TX) have put forth a proposal known as the Protecting American Taxpayers and Homeowners (“PATH”) Act. H.R. 2767, 113th Cong. (2013); see also John L. Ligon, Hensarling Housing Finance Plan: A Welcome Step Toward Solving the Fannie and Freddie Mess, HERITAGE FOUND. (July 22, 2013), http://www.heritage.org/research/reports/2013/07/hensarling-housing-finance-plan-welcome-step-tosolve-the-fannie-and-freddie-mess#_ftn1 (discussing and summarizing the PATH Act). Later, President Obama called for the elimination of Fannie Mae and Freddie Mac, but also mentioned other proposals that would further entrench government in the housing market. Jackie Calmes, Obama Outlines Plans for Fannie Mae and Freddie Mac, N.Y. TIMES (Aug. 6, 2013), http://www.nytimes.com/2013/08/07/us/politics/obama-fannie-mae-freddie-mac.html?_r=0.
65 MORGENSON & ROSNER, supra note 2, at 287; see also id. at 283 (“Almost 45 percent of subprime loans made during this period were low-documentation or liar loans and as many as 60 percent overstated their incomes by at least half.”). Despite their awareness that they did not need to produce documents for approval, many borrowers knew they could not afford the loans they obtained.
66 See supra text accompanying note 37.
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buyers obtain their first mortgage. Lenders will simply pass on regulatory costs to future borrowers.67 Abandoned property ordinances have become the next layer of regulation imposed on mortgage lenders. Are such ordinances constitutional, in terms of whether they are a legitimate use of government’s police power?
Are public objectives truly met? Assuming affirmative answers, are such ordinances wise and helpful? These questions are taken up in the next section.
III. THE CHULA VISTA ABANDONED RESIDENTIAL PROPERTY ORDINANCE(CVAPO) A. General Description
In 2007, the City of Chula Vista, California, enacted the CVAPO.68 The main thrust of the CVAPO mandates that mortgage lenders must undertake certain of the borrower’s contractual obligations after there is a default and the lender has recorded a notice of default that initiates a nonjudicial foreclosure.69 Upon a borrower’s “default”70 and after the recording 67 Lenders’ costs will increase because of the need to comply with new regulations that have resulted in extended foreclosure processes, and—in the case of abandoned property ordinances— registration, inspection, and maintenance requirements. These latter costs would, of course, be justifiable after the foreclosure sale has occurred because at that point the lender (or third party bidder) has become the new fee simple owner.