Law on Rice

So, as you are painfully aware by now, easy mortgage credit, especially cash out mortgages, really fueled the real estate bubble.  So, how did Texas–the land of bubbles–miss the foreclosure tsunami (over 13% of Arizona mortgages are in foreclosure)?  Maybe this Washington Post article has the answer:

[In Texas] cash-outs and home-equity loans cannot total more than 80 percent of a home’s appraised value. There’s a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it’s illegal to get even a dollar back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date from the first days of statehood in 1845, when the constitution banned home loans.

I am working as a law clerk until April for a creditors’ rights firm learning about foreclosures and creditors’ law in bankruptcy in a big building in downtown Phoenix.  And tonight, I just saw this article:

A lender is seeking to foreclose on the Viad Corporate Center, a high-rise office tower on Central Avenue in Phoenix, the latest example of the region’s commercial real-estate woes. Bank of America has asked a Maricopa County Superior Court judge to appoint a receiver for the signature tower at 1850 N. Central Ave. The lender said the building’s owner has not kept current since December on a $65 million loan.

Here’s the full article.

When I left Arizona, the real estate boom was reaching fever pitch. Shoot, it had been at fever pitch ever since the 1980s. Everyone had new cars that were shiny as new pennies, and Scottsdale threatened to eclipse Las Vegas.

As I drove on the Five through the rain this morning in Seattle, I heard that 14% of mortgages are behind or in foreclosure. And I wondered if Arizona will be the same when I come back?

Maybe all the cars will be the same, just not so shiny and new.

There’s a story about an elderly bank robber in San Diego on the LA Times blog right now. I first saw the story a few days ago. At that time, it was just a surveillance picture of what looked to be a very old man walking with a cane into a bank to rob it. It seemed kind of innocent at the time. Sort of like, “Look how cute, that old guy is robbing a bank!”

Now it turns out that it wasn’t all that innocent at all. Not only did he walk out with a lot of money on a really serious threat, but he was doing it because of a seriously high interest rate on his mortgage.

He could have just filed a chapter 13 to stop the foreclosure and possibly have been able to catch up. At 17% interest though, I don’t know… Maybe if he had filed, the mortgage company would have negotiated. Now he needs a very different kind of lawyer.

How depressing. The story is here.

The American Bankruptcy Institute gave me a link to an interesting article about the foreclosure mess that people (and banks) find themselves in these days, and it got me thinking: what exactly are all the legal issues raised by this situation?

Maybe I should step back. The Washington Post ran a story today about the fact that many homeowners are declaring bankruptcy (or just walking away from their homes), but the mortgage companies are simply not foreclosing. Indeed, “In better times, lenders tended to begin the foreclosure process after three months, said Guy Cecala, publisher of Inside Mortgage Finance. Now it is not unusual for it to take nine months for the process to begin, he said.”

So during this period, what legal issues arise? There are, of course, the contractual duties of the homeowners to maintain the properties, and the good will requirements of the lenders. Then there are the myriad of issues raised by bankruptcy. In addition, there might be tax issues for the long (involuntary) forbearances (think “income” under sec. 61(12) of the tax code). There there are all kinds of legal and equitable issues remedies like waiver and estoppel that might come into play. There are accounting and securities disclosure issues on the parts of the banks (especially after Spring’s FASB/mark to market changes) under the Securities Act and the Exchange Act. Also, what does this all mean for state foreclosure laws? In summary, I think there will be many law review articles springing from the 2008-2010 era!

I’ll leave you with this parting (and human) point from the article: For the Jensens, the delay has extended a painful period. “There was a sense of responsibility that until someone says we no longer own that property, we wanted to make sure it’s handed off correctly,” Jensen said. “We could have walked away like everyone else and said, ‘We don’t care.’ But we loved our neighbors and our neighborhood. We hold ourselves responsible.”