«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 ...»
Though he may have moved out, the great likelihood is that he is in the vicinity and is available to fulfill his ownership duties. On the other hand, the mortgage lender may not be as immediately available for any one of a number of reasons (as discussed above). An alternative party that could provide a prompt response is a homeowners’ association. A homeowners’ association has a secured interest in the property by virtue of the fact that its declaration of covenants, conditions, and restrictions is recorded and permits the association to enter onto the property under certain circumstances.336 In addition, the association is typically authorized to collect dues the borrower should remain responsible for the maintenance, particularly since municipalities that have enacted abandoned property ordinances have chosen not to address the question of culpability in the underlying loan agreement.
334 Easthampton Sav. Bank v. City of Springfield, 874 F. Supp. 2d 25, 28–29 (D. Mass. 2012) (upholding local ordinance that requires the owner (defined to include mortgagors and mortgagees) to provide the local building commissioner a cash bond of no less than $10,000 for maintenance and security).
335 See supra note 246.
336 A typical provision in a Declaration of Covenants, Conditions, and Restrictions authorizes “the subdivider or the Committee may enter upon the lands and remove the [nuisance] at the expense of the 2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 411 with which it covers the expense to maintain common areas. Since it has a daily presence within the common interest community, the association can promptly respond to maintenance and security needs at a given property. It would be alerted to a possible vacant home when it no longer receives the owner–borrower’s payments of the association dues. Though the failure to pay dues would impact the association’s revenue to one degree or another, the association could still quickly discover whether the property is vacant, and then register with the city if it is. At that point, the city could contact the borrower through the U.S. Post Office and pursue its remedies under the standard public nuisance regulations. Moreover, the declaration provides procedural safeguards of notice and hearing when the association pursues its own remedies, including judgments and enforcement of liens.337 An obvious problem with this alternative is the fact that not all properties that will be the subject of a foreclosure are within a homeowners’ association. However, the close proximity of homeowners’ associations makes them the most immediately available party to respond to a vacant property, that is within the association. In Chula Vista the majority of foreclosures occurred in the area of the city that is made up almost entirely of homeowners’ associations.338 This likely occurred because the area is made up of new developments where purchasers paid higher prices and obtained larger loans, which made the purchasers more susceptible to defaults and foreclosures. Where the locus of a concentration of foreclosures is within a homeowners’ association, then the association is a viable option to quickly and cost-effectively inspect, register, and maintain the property, or at least determine the status of occupancy and notify the city if necessary.
At a minimum, the local governing body ought to amend abandoned property ordinances to provide lenders with a measure of protection against certain unintended consequences. These ordinances force lenders to enter onto the property to conduct inspections and maintain the property. Such entry and work may give rise to claims by borrowers against lenders. A provision can be added that is similar to the regulation in Las Vegas, which declares that no claim or duty is created in favor of any party except the city.339 Further, the local authorities could at least amend such ordinances owner and such entry shall not be deemed a trespass.” LexisNexis Forms: FORM 240-22.77 Statement of reservations and restrictive covenants-single family residential development 8.
337 Before the judgment sale occurs, an association would be required to provide notice to all parties with security interests in the subject property. CAL. CODE CIV. PROC. § 701.540 subd. (h).
338 Lori Weisberg, Homeowners associations countywide are hit by foreclosure fallout and feeling the pinch of... Unpaid dues, SAN DIEGO UNION-TRIB. (Nov. 1, 2007) (“Especially vulnerable are smaller condo-conversion projects and developments in more affordable areas, such as eastern Chula Vista, where first-time homeowners stretched themselves financially to buy, using loans with low teaser rates that have since reset upward.”).
339 See supra text accompanying notes 88–90.
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to include a provision that imposes joint and several liability on the borrower, as has been done in Fort Lauderdale, Florida.340 If local government will not repeal such ordinances, which is virtually guaranteed under the currently popular government-fixes-all mentality, then the ordinances must be forced to withstand constitutional scrutiny. Local government ought to clarify such ordinances so that the circumstances that establish when property is “not legally occupied” or “shows evidence of vacancy” are not ambiguous and the standards to maintain and keep secure the property are clearly understood.
The government’s subprime home ownership policy led to the subprime mortgage disaster. The policy is subprime primarily because the federal government mandated a system that enabled mortgage lenders, government-sponsored enterprises, and investment bankers to earn profits from mandated subprime mortgage loans and then to receive bailout money when the system collapsed. This government-inspired system provided bailout money (in the form of loan modification and other programs) for the borrowers too. Government callously turned to the taxpayer to pay the bill.
There is nothing prime about this arrangement.
Another negative aspect of the subprime home ownership policy is the persistent belief in the notion that additional regulation will solve the problem de jour, or in this case, the crisis of an era. Local government continues this practice through the abandoned property ordinance. Such an ordinance erodes the rule of law in that it impairs a private contract between private parties by intentionally reversing the parties’ stated intent to assign in a lawful way the rights, duties, and risks of their contractual relationship. It is not as if the parties sought to violate the law or circumvent good economic practices when they agreed that the borrower was required to take care of the home he purchased. The rule of law is undermined 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 authority against wrongdoers.
But, an abandoned property ordinance does not require the adjudication of wrongdoing and does not seek to find fault between a lender and a borrower. Instead, such a regulation holds lenders strictly liable, making an economic choice that contradicts a requisite of the rule of law: the private parties’ reliance on the certainty and enforceability of an otherwise lawful contract. Economic activity is just as much a core fundamental necessity and voluntary pursuit as any exercise of a right under the First Amendment of the U.S. Constitution. Thus, abandoned property ordinances ought to be 340 See supra text accompanying notes 85–87.
2014] NATURE ABHORS A VACUUM AND SO DO LOCAL GOVERNMENTS 413 scrutinized under a standard higher than the current rational relation test with less deference by the courts.
The rule of law is also eroded in the way an abandoned property ordinance expands police power authority without findings that are based on substantial empirical data that blight actually exists. In the mind of code enforcement personnel, speculation that a serious problem might occur apparently is sufficient to justify releasing borrowers from a significant contractual obligation to care for his property, rendering public nuisance regulations superfluous in those instances when a borrower has defaulted on his mortgage loan and abandoned his property. Encouraging a borrower’s irresponsibility toward his contractual obligations and binding a lender to property maintenance because of its deep pockets is unfair and inequitable, thus further eroding the rule of law.
An abandoned property ordinance that is vague is not constitutionally valid. The abandoned property ordinance does not sufficiently define when a mortgage lender that has recorded a notice of default must start to maintain that property after the borrower later abandons it. Moreover, the ordinance poorly defines what the standard for maintenance is once the lender begins that task. When mortgage lenders must guess at the meaning of certain critical terms in the ordinance and may suffer a fine or criminal prosecution if they guess incorrectly, the ordinance does not inform the lending industry of what is expected so that lenders have the opportunity to consider the cost of doing business. If a lender’s mistake is overlooked, that would occur only because of the local official’s sole discretion. The ordinance is thus arbitrary.
Further, the ordinance erodes the rule of law because at this point it is not clear if a foreclosing lender will obtain the remedy that it needs. A mortgage lender may not be able to recover its costs through its credit bid at the foreclosure sale. Where there is a wrong, there must be a remedy, unless we have arrived at the point where local government’s police power now authorizes a regulation that mandates one party to a contract to pay for the other party’s breach without reimbursement. This creates an inequitable turn of the contract terms.
The CVAPO and all other ordinances like it are not good legislation for the economy, the housing and lending markets, the virtue of personal responsibility, and the essential rule of law. Therefore, such ordinances ought to be repealed.
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BETTING THE FARM: THE LIMITS OF GUARANTOR PROTECTION
UNDER THE SERVICEMEMBERS CIVIL RELIEF ACT
INTRODUCTIONAfter retiring from a career in the military, a husband, along with his wife, invested in a hardware business.1 To support the business’s operations, the husband and wife risked their home and the family farm as collateral for a $700,000 loan from a local bank. Knowing that many small businesses fail,2 the bank required a 10.25% interest rate on the loan. In addition, the bank required that the husband and wife execute a contract called a guaranty, whereby they, as guarantors, promised to personally pay the business’s debt if the business failed to adhere to the terms of the loan. The hardware store turned a profit the first year but struggled to break even in the years that followed. While the business was struggling to stay afloat, the wife, a Navy reservist and the hardware store’s vice president, was called into active military duty. Within ten months of the wife’s call-up to military service, the hardware store finally failed and closed its doors for good. After liquidation of all the business’s assets, the original $700,000 loan had a remaining balance of over $300,000. By the terms of the guaranty, the bank could seize the couple’s home and farm as collateral if the remaining balance was not paid immediately—the couple had truly bet the farm on the success of the store.
This true story illustrates the difficulties faced by both small business owners and servicemembers, two constituencies critical to the welfare of the United States. President Obama recently described the importance of small business owners when he stated that “small businesses are the engine of economic growth in this country.”3 Similarly, President Obama emphaGeorge Mason University School of Law, Juris Doctor Candidate, May 2014; Johns Hopkins University, M.A. Applied Economics, 2008; Cornell University, B.A. Economics, 2005. Thanks to Professor D. Bruce Johnsen and Emily Barber for your guidance and feedback, and to my wife Sam for your love and support.
1 These facts are taken from Newton v. Bank of McKenney, No. 3:11cv493-JAG, 2012 WL 1752407 (E.D. Va. May 16, 2012).
2 Frequently Asked Questions, SMALL BUSINESS ASSOCIATION 1 (Jan. 2011), http://www.sba.gov/sites/default/files/sbfaq.pdf (showing that only half of new small businesses survive at least five years).
3 Barack Obama, U.S. President, Remarks at the College of Nanoscale Science and Engineering, State University of New York, (May 8, 2012), available at http://www.whitehouse.gov/the-pressoffice/2012/05/08/remarks-president-albany-ny.
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sized the significance of servicemembers by stating, “[L]et us always stand united in support of our troops, who we placed in harm’s way. That is our solemn obligation.”4 That this husband and wife’s hardware store was one of 2.4 million veteran-owned firms, representing 9% of all firms conducting business in the United States, demonstrates how important servicemembers are in building and maintaining small businesses.5 Recognizing the plight of servicemembers in these situations, Congress has provided a set of protections and benefits for servicemembers in the Servicemembers Civil Relief Act (SCRA).6 Without the SCRA, the bank could seize the family’s farm while the wife is serving her country;
with the SCRA, the bank cannot seize the wife’s nonbusiness assets7 nor obtain a default judgment against the wife while she is in active military service.8 While the servicemember would not need to worry about losing the family farm during her active military service, she may still have to worry about the potentially large interest payments that will accumulate because of the ambiguity of § 527 of the SCRA as to whether a guarantor can be liable for interest in excess of 6%.9 In fact, if she is liable for interest in excess of 6%, the amount for which she is personally liable could increase by over $23,000 by the time her active military service ends.10 An additional liability of this amount could be the difference between keeping and losing the family farm.