«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 ...»
Despite the fact that his own actions put him in default, a borrower could argue that any action taken by the lender without the knowledge or consent of the borrower is a breach of the loan agreement that could potentially expose the lender to liability.324 The borrower could further contend that any fees or costs incurred by the lender under the CVAPO before or after the lender filed a notice of default cannot be a charge against the borrower that is added to the lender’s foreclosure credit bid. For the lender that in the meantime works to confirm the property is “not legally occupied” but does not maintain the property out of caution so as to avoid such claims, there is the looming threat the city will apply fines or perhaps pursue prosecution of a criminal misdemeanor charge.
For insulation from liability, lenders could seek court appointment of a receiver, but this remedy would likely delay the start of inspections or maintenance and increase court costs and legal fees. A borrower, however, may argue that since the court-appointed receiver’s costs and fees are to protect the lender from liability for its compliance with the CVAPO, such expenses are administrative and therefore not the same as those costs and fees related to foreclosure that can be added to the borrower’s debt. The lender that does obtain a receiver could incur nonrecoverable costs, despite the fact that it was the borrower’s default that initiated the problems.
Again, the borrower could contend that the expenses for registration, registration fees, property management companies, receivership fees, court costs, and perhaps others should be characterized as administrative in nature in that they concern the lender’s compliance with local government’s oversight of the lender, not the borrower. Under the borrower’s construction, fees and costs of this nature are not authorized under the state’s foreclosure statutory scheme. Therefore, the borrower would assert that the lender cannot add these expenses to the amount owed by the borrower.
Unlike the abandoned property ordinance in Las Vegas, Nevada,325 the CVAPO and others like it do not shield lenders and instead leave them vulnerable to legal attack from borrowers. It is evident by the shield set out in the Las Vegas ordinance that the prospect of unintended consequences was taken seriously. That consideration is absent from the public record in Chula Vista. Unfortunately, many abandoned property ordinances reflect local 324 See generally Richard E. Gottlieb, Margaret J. Rhiew, Brett J.
Natarelli, Reckless Abandon:
Vacant Property Ordinances Create Legal Uncertainties, 68 BUS. LAW. 669 (2013). This would, of course, depend on what the lender’s actions were. Such claims by the borrower could conceivably include actions for forcible detainer, trespass, interference with quiet use and enjoyment, breach of the loan agreement, or indemnity if the lender’s entry were to put the borrower, as a landlord, in breach of a rental agreement. Likewise, the borrower might be able to somehow use the lender’s acts as a defense against a foreclosure. See generally 12 MILLER & STARR, CAL. REAL EST. §§ 36:1 et seq. (3d ed. 2002).
325 See supra text accompanying notes 88–90.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 407 government’s speculative, short-sighted approach to “risky financial arrangements” and foreclosures. Such ordinances let the lenders maintain the property regardless of the costs that will be passed on; regardless of the liability that lenders may face from borrowers; and, regardless of the irresponsibility the ordinance inexplicably encourages in borrowers notwithstanding the contractual promises and moral duties to which the borrower willingly assented.
b. Lender’s Fees and Costs are Unreasonable
In the event that such expenses were not characterized as administrative, the borrower could still contend that these expenses are unreasonably high, which may be true given the extent of costly regulations and the current rates of property managers, receivers, general contractors, and others that would be hired to complete the tasks required of the lender. Courts may be open to this argument because the lender’s recovery would not be enhanced since the average house value has dropped below the amount of the loan balance, and in any case the lender cannot pursue the borrower after the foreclosure sale due to the anti-deficiency judgment protection in California and other states.
c. Advances by a Junior Lender to a Senior Lender
Another issue raised by the CVAPO relates to advances made by a junior lender to reinstate the senior loan. Typically, when a junior lender, whose deed of trust is recorded after the senior lender’s deed of trust, makes an advance pursuant to the junior deed of trust on behalf of the borrower to cure his default on the senior loan, the junior lender can commence its own foreclosure and add such advance to the amount owed on the junior loan.326 Since the CVAPO makes no distinction between senior and junior lenders in respect of the obligations under its regulatory scheme, the burden to comply falls on the lender that first records its notice of default.327 If the property is “not legally occupied” or shows “evidence of vacancy,” only the lender that records a notice of default must inspect, register, and maintain the property.328 Where the senior lender records its notice of default, it must comply with the CVAPO. A junior lender must then evaluate whether it will protect its security interest and rights by advancing funds to cure the senior loan, and also consider the senior lender’s and its own costs of comSuch was the situation in Passinisi v. Merit-McBride Realtors, Inc., 190 Cal. App. 3d 1496 (1987). See supra notes 294–95 and related text.
327 See generally supra Part III.A.
pliance with the CVAPO before it advances funds. That is, the junior lender must determine if the total sum of expenses for the advance to the senior, compliance with the CVAPO, and foreclosure exceed the balance due on the junior loan. Lenders, regardless of their priority position relative to other secured creditors, are experienced and competent in the deliberations regarding the advancement of funds on behalf of a borrower in default.
Now, however, they must incorporate into their deliberations the issues raised by the new layer of regulations mandated by abandoned property ordinances.
It would not be a surprise if costs of junior loans go up even higher than senior loans due to the way local government has turned the lender– borrower deed of trust maintenance–security provision upside down. Mortgage lenders must recalibrate whether it is in their best interests to write loans for marginal borrowers given the costs that will be incurred upon default and abandonment. Abandoned property ordinances practically institutionalize subprime mortgage loans, which lenders presumably would provide at higher interest rates and closing costs.
Currently, the effects of the subprime mortgage fiasco are persistent, though there are fewer foreclosures329 and housing values appear to be on a modest upward climb in some areas.330 Yet the economy in general continues to sputter. Spending programs at all levels of government have not restored the economy, putting into doubt the wisdom of deficit spending and making taxpayers and future generations long term debtors. The spending and the programs may actually portend a worse economic disaster in the long run. In the meantime, new regulations that were meant to deal with the financial crisis continue to choke economic activity and the underlying freedom that is necessary for individuals and businesses to pursue their economic goals. In some ways we are witness to the modern version of the 329 Erik Anderson, Mortgage Delinquencies Fall As Housing Market Bounces Back, KPBS (Aug.
12, 2013), retrieved from http://www.kpbs.org/news/2013/aug/12/mortgage-delinquencies-fall-housingmarket-bounces/ (“The nation’s Mortgage Bankers Association said mortgage delinquencies have hit a five-year low.”); see also Erik Anderson, California Foreclosures Fall As Home Prices Rise, KPBS (July 23, 2013), available at http://www.kpbs.org/news/2013/jul/23/california-foreclosures-fall-homeprices-rise/ (“Dataquick, which tracks the state’s housing market, said lenders issued just over 25,000 notices of default. That’s the first step in a long foreclosure process. That amount of notices is the second lowest quarterly number in seven years and well below the peak of more than 135,000 notices in the first quarter of 2009.”).
330 Lily Leung, Home price gains in SD outpace U.S., THE SAN DIEGO UNION-TRIB. (Aug. 27, 2013), available at http://www.utsandiego.com/news/2013/aug/27/san-diego-home-prices-real-estatevalues-gains/ (“San Diego home prices in June rose 19 percent from a year ago, which marks its largest year-over-year hike since March 2005.”).
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 409 approach taken in the New Deal era—program after program were implemented with deficit spending to end the Great Depression, but the Depression was actually prolonged as a result of those economic policies.331 Today, governments’ new spending programs and new layers of regulations could very well be the reason the Great Recession continues. Rather than repeat the mistake of retaining restrictive legislation and costly programs, abandoned property ordinances ought to be repealed since foreclosures have tapered off and the risk of blight has subsided. The reasons that were given for abandoned property ordinances are no longer persuasive and do not justify their retention.
Local government should do its part to restore the deeper meaning of home ownership and the vitality of the home mortgage market by repealing abandoned property ordinances. Under the current regime of bailout programs and more regulation, home ownership is at the same time made cheaper and costlier. It is cheaper because the standards for ownership are so low that it has become nearly meaningless. Hard work, saving money, and sacrifice are not held out as virtues that produce a multiplicity of benefits. Borrowers from some communities were virtually given the loan to purchase a home and now face no consequences for default or abandonment.332 Yet, home ownership is more costly because other sectors of society must bear the expense of more government control through regulation and more debt due to government deficit spending for subsidies. Socialization of home ownership is a bad idea, as can be seen from the fallout of the financial crisis and the underlying policies that fostered it.
The repeal of abandoned property regulations would not put municipalities at greater risk either because local government can enforce public nuisance ordinances and other regulations already on the books in such a way as to reinforce the owner–borrower’s personal responsibility of home ownership. A borrower in default should not externalize his costs on his lender, future borrowers, or taxpayers. Borrowers should be given the message that ownership responsibilities run until he voluntary transfers title or involuntarily loses title. Moreover, risks of blight should be manageable given the fact that there are fewer foreclosures. If local legislators cannot compile the empirical data of serious blight problems to justify abandoned property ordinances, then such ordinances ought to be repealed. But if such ordinances remain, they should at a minimum be amended to require the borrower to take care of the property.
Borrowers fully understand that home ownership carries responsibility with it, even if they do not understand the details in the loan documents they sign.333 Accordingly, it is appropriate to ask the borrower to take steps 331 AMITY SCHLAES, THE FORGOTTEN MAN: A NEW HISTORY OF THE GREAT DEPRESSION (2008).
332 See generally supra Part II.
333 Even if the borrower does not know the details of a “risky” loan, he is aware that he has purchased a home that requires maintenance. This knowledge alone ought to be dispositive as to whether
to assure his lender and local authorities that the home will be maintained and kept secure after he moves out. As set out in one local ordinance, a borrower could be mandated to buy a bond that covers the costs of maintenance, repair, and security.334 Obviously, the borrower would be required to provide the bond at the time of purchase of the house. This type of requirement is sensible given the fact that continued government intervention would continue to restrict the lenders’ use of traditional lending criteria.
Local officials could require a borrower to notify the city of his default or abandonment when he learns that he does not qualify under a loan modification program and cannot resolve his default. This requirement would make sense to a borrower who plans to move for nondefault reasons, since he would submit a change of address form to the U.S. Post Office at the time of his move. He need only provide one more form to the local official.
The burden on the borrower would be minimal and the form submitted to the local official would disclose information similar to that in the publicly recorded notice of default or the change of address form. In addition, a borrower could be required to provide local officials with contact information and forwarding-address information, or grant consent to local officials to obtain such information from the U.S. Post Office. Federal regulation already authorizes local government to obtain certain mailing information.335 This requirement would enable officials to contact borrowers to notify them of the legal obligation to take care of the property.
Local officials enacted abandoned property ordinances as the means, at least in theory, for prompt and efficient responses to vacant property.
The borrower is the person with the immediate connection to the property.