«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 ...»
235 One does wonder what city councils around the country were thinking when borrowers received financial amnesty by legislative fiat. The question is asked with regard to the wisdom of the regulatory scheme, not as a matter of law. The courts do not ordinarily consider motive of the local legislature when it passes an ordinance. Nat’l Indep. Bus. Alliance v. City of Beverly Hills, 128 Cal. App. 3d 13, 22 (1982) (courts will not consider motive unless there is fraud or something on the face of an ordinance 2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 389 tions—building code, residential code, housing code, plumbing code, a public nuisance ordinance, and others236—provide the city with formidable tools and remedies with which to bring property owners237 in line with community standards for property conditions and value. Instead, abandoned property ordinances impliedly urge borrowers to be irresponsible since they will face no repercussions for abandoning their property. It is not wise public policy to further erode personal responsibility in a society that suffers extensively from individual irresponsibility as it is.238 It is necessary for citizens to evaluate the wisdom of abandoned property regulation.
The rule of law is defeated because an abandoned property ordinance is unfair and inequitable. Since fault is irrelevant, the sole function of such an ordinance is to achieve a pragmatic goal that the borrower could accomplish without a greater financial burden on lenders and subsequently on future borrowers, notwithstanding the fact that he is in default and has abandoned the property.
Are there no other means by which to assure that property maintenance obligations stay with the borrower? Would it not be more reasonable to craft legislation that reinforces the contract parties’ division of rights, duties, and risks regarding the property, particularly when local government does not intend to use resources to adjudicate whether one party or the other has committed illicit acts or seeks a remedy with unclean hands?
Legislators that enact abandoned property ordinances can follow the example of other legislation that retains the responsibility of ownership on the owner himself. For example, regulation appropriately requires automobile owners to obtain periodic inspections to assure the vehicle satisfies standards of safety and to obtain auto liability insurance.239 The responsibility rests with the owner—not the lender—and the obligations of ownership do not change when there is an upward spike in auto accidents.
In recognition that the condition of property directly impacts its value, the CVAPO helps to ensure that property is maintained and kept secure.
This tends to reinforce and even elevate community standards of ownership and good stewardship. Such benefits should and can be attained by reinforcing the owner–borrower’s personal responsibility. Instead of promoting these positive traits, abandoned property ordinances interfere with a private contract and mandate property maintenance by lenders at the expense of that indicates an improper motive when it was passed or inferable from its operation or effect of which a court can take judicial notice).
236 See CHULA VISTA, CAL., MUN. CODE TITLE 15, Ch. 15.04–.60 (2013).
237 That is, such property owners who hold a fee title interest rather than only a security interest.
238 A free society founded as a constitutional republic with an inextricable reliance on a people with sound moral character nonetheless faces the risk of individuals’ abuse of that freedom. Government should not open the door further to the risk and encourage the abuse through regulation, however.
239 See, e.g., CAL. VEH. CODE § 16020 (2011) (financial responsibility for auto accident); CAL.
VEH. CODE § 2814 (2011) (auto inspections).
indulging borrower irresponsibility so that borrowers externalize their costs onto lenders and future borrowers. The officials’ top priority ought to be to reinforce the duties of all private property owners and contractual obligations, so as to reaffirm the law’s preference for certainty and stability in the market.
Moreover, there is an absolute necessity to scrutinize and hold accountable government whenever it exercises its power to preemptively regulate the conduct of citizens. The necessity arises from the bedrock principles that the legislature’s authority is limited, and must be closely scrutinized in those instances when regulation excessively interferes with lawful private economic conduct and private agreements between private parties. In his argument in support of a return to a more vigorous judicial review of legislative enactments restrictive of property rights, Professor Bernard Siegan
Yet the judiciary is the branch of government to which those who are adversely affected by legislation must look for relief. Justices are not intended to be government agents, furthering the interests of the executive and legislative branches in their disputes with citizens. Thousands of people and billions of dollars are already devoted to this cause. A judicial system more concerned to protect the power of government than the freedom of the individual has lost its mission under the Constitution. In a society that extols private property and private enterprise, those who engage in economic activities in reliance on existing laws are entitled to be secure against arbitrary and confiscatory government actions. If at all possible, society should not penalize or punish people who observe the rules and commit no wrongs. This is one of the major reasons that we have a Supreme Court and that we grant it enormous power over lawmakers.240 As it is, individuals and businesses are subject to extensive regulation due to executive and legislative officials’ incessant enactments that expand their power and control over ever-increasing areas of citizens’ personal lives. With regard to the CVAPO, it is unwise and unfair to expand government control by way of a regulation that alters a private contract on the basis of speculation that blight might result.
It is not as if the local government, in its exercise of police power, will reduce the taxpayers’ burden by shedding the code enforcement costs onto deep-pocket lenders241 and then imposing fines on them for noncomBERNARD H. SIEGAN, ECONOMIC LIBERTIES AND THE CONSTITUTION, 6–7 (1980). Professor Siegan published a second edition of this book in 2006, but the quotation is taken from the first edition because he completely revised the organization and content of the second edition.
241 See Zywicki & Adamson, supra note 39, at 4 (“Heightened protections for borrowers that increase the cost or risk of lending will raise the cost of lending and result in either higher interest rates for borrowers or reduced access to credit.”) (footnote omitted).
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 391 pliance.242 The inevitable result will be that citizens will pay higher loan costs the next time they obtain a loan in locales that have enacted abandoned property ordinances. Very few people can purchase their home without a loan; consequently, the majority of citizens will have those local governments to thank when lenders pass on the costs of compliance with such ordinances through an increase in the cost of loans. What local government has done, then, is to make the burden on the taxpayer (soon to be borrower) heavier due to higher loan costs on top of taxpayer bailouts.243 The city council’s choice to impose the regulation on lenders is not as effective as it would be if it was imposed on borrowers. As such, it is arbitrary, unreasonable, and unfair. The CVAPO regulatory scheme rests entirely on a lender’s recordation of a notice of default against an owner– borrower who is in default. It is very possible that a lender will not record the notice of default;244 it will be reluctant to record because it must comply with a number of new statutes enacted to “solve” the financial crisis,245 including California’s so-called Homeowners’ Bill of Rights that requires, among other things, preforeclosure notice and consultation with the borChula Vista City personnel cite as a measure of the success of the CVAPO the amount of registration fees and fines the City has recovered from lenders since enactment. See Testimony of D. Leeper, supra note 15, at 97, 104–05.
243 See supra text accompanying note 52.
244 Lenders may choose not to record for a variety of reasons. A lender may not proceed with foreclosure because it considers the borrower’s absence from the property to not be a breach of the loan agreement at all. If the borrower is nonresponsive or cannot be found it may take months before the lender locates the borrower and discovers the facts on the ground. It is conceivable that a borrower (or tenant) can be on an extended business trip or vacation, but not make arrangements for property upkeep and not inform the lender. Also, the sheer volume of defaults and foreclosures on other loans outside the municipality may cause a long delay in the lender’s response. For these reasons a notice of default is not recorded and the City’s objective is not realized, but frustrated.
245 Federal legislation was enacted to assist borrowers in the aftermath of the subprime mortgage fiasco. See supra note 66. A federal court ruled that the Home Owners’ Loan Act (“HOLA”) of 1933, 12 U.S.C. §§ 1461 et seq. (2012), preempts California Civ. Code § 2923.5, a measure that mandates lenders to make a good faith effort to assess and explore loan modification with the borrower. Rodriguez v. J.P. Morgan Chase, 809 F. Supp. 2d 1291 (S.D. Cal. 2011). However, a recent California court decision ruled that HOLA did not preempt CAL. CIV. CODE § 2923.5 (West 2013). Ragland v. U.S.
Bank Nat’l Assn., 209 Cal. App. 4th 182, 201–02 (2012); see also Skov v. U.S. Bank Nat’l Assn., 207 Cal. App. 4th 690, 702 (2012) (reversed judgment that sustained demurrer because there were factual issues regarding lender’s compliance with sec. 2923.5, (citing the holding in Mabry v. Superior Court, 185 Cal. App. 4th 208 (2010) (federal law did not preempt sec. 2923.5))). The conflict has yet to be resolved. CAL. CIV. CODE § 2923.5 (2013) declares that a lender cannot file a notice of default until 30 days after it makes contact with the borrower or it satisfies due diligence through good faith efforts to do so; a lender must “assess the borrower's financial situation and explore options for the borrower to avoid foreclosure” before it records a notice of default. Section 2923.5 was incorporated into and amended by the “Homeowners’ Bill of Rights,” which became effective January 1, 2013. See 2012 Cal. Stat. ch.
86–87 (AB 278 and SB 900).
48392 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 10:2
rower with a view toward loan modification.246 Without the recorded notice of default, the CVAPO does not apply and code enforcement personnel are left to maintain the property, frustrating the city’s objective, unless of course it were to hold the borrower accountable. Even when a loan modification is not granted, there very well may be a long delay before the notice of default is recorded, and the objective of prompt inspection, registration, and maintenance will not be realized. Meanwhile, the typical borrower who has vacated the property but who is still the fee owner remains in the area and is still subject to the range of code enforcement provisions available to the city.
Notwithstanding the borrower’s default and abandonment of the home, the typical borrower does not go into hiding. Many borrowers in default may have lost their jobs during the recession, but most likely remained in the area familiar to them and where their families and friends lived. Other borrowers who retained their jobs but vacated their homes also remained in the area. Local code enforcement personnel have the authority to obtain borrowers’ change of address and post office box information, making it easier and more cost effective than locating a lender.247 While the borrower may have given up on his home to foreclosure, he nonetheless remained subject to all legal requirements attendant to fee ownership of the property.248 It would not be below his station to mow the lawn, clean the yard, pick up mail, paint over graffiti, and complete the tasks necessary to maintain and keep secure the property until title changes at the foreclosure sale.
The Chula Vista council ignored the party most responsible for the maintenance obligations and arbitrarily imposed them on lenders without any investigation as to whether a particular lender had defrauded or manipulated a borrower or whether there was another party better suited to maintain the property.249 This choice has enabled borrowers to skirt their personal commitment to care for the property they purchased, without any inCal. Stat. ch. 86–87 (AB 278 and SB 900), amending, repealing and reenacting numerous provisions of the Civil Code, now found in CAL. CIV. CODE, §§ 2920, 2923.4, 2923.5, 2923.6, 2923.7, 2923.55, 2924, 2924.9, 2924.10, 2924.11, 2924.12, 2924.15, 2924.17, 2924.18, 2924.20 (West 2013).
The “Bill of Rights” is due to expire on January 1, 2018 unless extended.
247 Names and addresses of individuals are available to local government agencies pursuant to 39 CODE OF FED. REG. § 266.4 subd. (b)(3), §§ 265.6 subd. (d)(1), (d)(4), (d)(5)(i) (2012). In addition, change of address information and post office box holder information is available pursuant to § 266.4 subd. (b)(1)(i) (individual provides written request for dissemination of his information) or § 266.4 subd. (b)(1)(ii) (individual grants written consent to U.S. Post Office to release his information). See also Testimony of D. Leeper supra note 15, at 97, 100, 101 (discussing the difficulty in locating originating lenders or assignees). What Mr. Leeper did not discuss in his testimony is the borrowers’ primary responsibility for the property and did not indicate that it would be more difficult to locate the borrower than the lender (assuming Mr. Leeper is correct in his assessment about locating lenders).
248 Specifically, the borrower, as the fee owner, is subject to liability for violations of the loan agreement and public nuisance ordinances.
249 See supra Part III.B.3.b.