Double Standard

Recently in class I mentioned that at times it can be a good business decision to default on one’s loan obligations, and that doing so is not necessarily a sign of poor moral character. I recognized that my students–undergraduates all, mostly sophomores–have neither the business nor life experience to truly grasp my point, and even if they did they would not necessarily agree with it.  It’s legalistic, based as it is on non-recourse financing, bankruptcy reorganization, rejection of executory contracts, and other remedies that show a binding promise is not necessarily binding. It was not essential to our discussion and I didn’t belabor the point.

I thought of it again upon read James Surowiecki’s “Living by Default” in the December 19 & 26, 2011 New Yorker. (Keeping current with The New Yorker would require that I cut back on working, working out, sleeping, or other reading.) Surowiecki mentions that American Airlines chose recently to file for bankruptcy:

Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs. American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business.

Seeing that strategic defaults are an acknowledged business risk dealt with by contract terms, negotiations, and restructured business deals, Surowiecki asks why more homeowners with underwater mortgage debt don’t walk away from their loans?

The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.

It’s a valid question. Surowiecki provides a few practical answers–dealing with the consequences a loan default is hard work, many homeowners have unrealistic views of the their home’s value–but says the biggest problem is the social stigma of defaulting on one’s home mortgage:

According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.”

If you are interested Surowiecki makes the point far better than I made it in class discussion.

The Meaning of “Proceed at your Peril”

“Home razed after neighbors’ 18 year legal-battle” in today’s Boston Globe proves why it’s not always a good strategy to beg forgiveness than ask permission. In the 1990’s Wayne Johnson built a 5,000 square foot house overlooking Marblehead  Harbor.* The house would interfere with a neighbor’s access to sunlight and ocean view–although there’s a question of how much water they actually see from their property. The neighbors challenged whether the house complied with zoning requirements. In 2000 the Land Court ruled against Johnson and ordered the house removed because the lot did not satisfy the town’s lot width requirement. [Marblehead zoning required “that no part of the lot be less than 75% of the lot’s required frontage. The lot has the minimum required frontage (100′), but is only 62.67′ wide at its narrowest – 12.33′ less than required.”) The Land Court judge warned Johnson in open court “that he proceeded at his peril.” When the Land Court issued this ruling construction had not actually started. Ignoring the court’s warning Johnson built the house while he pursued various appeals, to the Massachusetts Appeals Court to overturn the Land Court ruling and with the local zoning authorities, to obtain a special permit or change the applicable zoning.  None was successful. A court ordered Johnson to remove the house by October 4, 2010. He did not. The neighbors then sued Johnson for contempt of the removal order. Last November the Land Court ruled in their favor:

Sixteen years after filing, eleven years after entry of judgment, five years after that judgment was affirmed, and after all other possibilities to change the demolition and removal order have been attempted and rejected, this case has reached an endpoint. In accordance with that judgment and this court’s order dated August 2, 2010, the house at 74 Bubier Road must be demolished and removed, immediately. If Mr. Johnson has not entered into a contract by December 16, 2011 for the prompt demolition and removal of the house and foundation and the re-grading of the lot, he shall be held in contempt of this court, to be enforced by all appropriate remedies. A copy of that contract must be filed with the court and served on counsel by no later than December 19, 2011. If, for whatever reason, Mr. Johnson fails to comply with this order, the Scheys may themselves proceed to have the house demolished and removed and seek appropriate orders from this court for reimbursement of all associated costs.

The house was demolished yesterday.

Johnson’s house is marked “A.” I assume the Schey’s house is immediately to its left, and thus Johnson’s 35′-foot high structure is akin to a wall built in their backyard. Photos of the house and its demolition are here.

*Facts are based on Judge Long’s 18-Nov-11 Land Court opinion, not the Globe article.

“Symbols of Broken Dreams”

This slide show and photographer’s audio document the aftermath of Ireland’s housing boom. In the early 2000’s Irish developers built more housing units than Ireland’s population could fill, banking (literally) on mass home ownership by Irish ex-pats and foreign workers. Believing prices would not decline the Irish bought each other’s real estate in a hothouse of speculation–until the debt crisis tanked the market. Now thousands of housing units stand unfinished or unoccupied–“to rot,” in the words of photographer Kenneth O’Halloran.

Coming to a Foreclosure Sale Near You

SOAP =  Snakes on a Plane.  SIAH = Snakes in a House.  Thousands of ’em, in the walls, ceilings, and floors, slithering through the grass, fouling the well, driving an Idaho family from the house they purchased last January.  Stories:  Idaho House Infested With Snakes; Foreclosing On a Bunch of Snakes.  Video:  http://youtu.be/Hs2g22APCQg

Snakes would be bad.  Worse would be wolf spiders.  This beauty was on recently on my chimney in Maine.  I didn’t get close enough to it to provide a scale of reference (hence the fuzzy iPhone image), but its leg span was easily 3.5-4 inches.

Real Estate Project

I planned to begin the summer by revising the real estate course.  I carted a briefcase of real estate books to Maine–it went unopened and remains where I set it down in the mudroom when I returned home last Friday. I was about to unpack it until I remembered I’m returning to Maine tomorrow and could just put the briefcase back in the truck.   Revising the real estate course remains my first academic project but others have elbowed ahead of it in line:  pressure wash the entire Maine deck, plant and transplant perennials and weed the perennial garden, replace deteriorated deck in Maine, and rebuild an entire portion of the deck at home. This project grew more complicated as I removed existing decking and discovered no flashing, water-damaged trim, sheathing, balusters, and rails, an uninsulated crawl space beneath the old sun porch I converted to an office (so that’s why my feet are always freezing in the winter, jerry-rigged stair stringers, and other horrors.  What I figured to be a couple of afternoons of cutting and nailing turned into a full day of demolition, improvised structural fixes, and multiple trips to National Lumber and Home Depot.

But it is real-estate related.

Bad Law

I believe the law should protect the rights of residential tenants and that communities should have a legal responsibility to foster development of affordable housing.  I do not, however, support laws that produce the result described in The Small-Time Landlord Versus Tenant Protection in the April 30 New York Times.   It relates the story of Wayne Koniuk, who owns a three-apartment building in San Francisco (I’d call it a triple decker but don’t know its layout) bought by his father in 1970 and then given to him in 2001 “so Wayne could run his business on the ground floor and Wayne’s adult children would always have a place to live..”  In 2007 Wayne gave a half-interest in the building to his oldest son, who evicted the tenant living in one of its apartments and moved in.  Now Wayne wants to, but cannot, move his youngest son into the other apartment. San Francisco law allows the owner to evict a tenant and move into the vacated unit only once.  As the article describes the law Wayne’s other son, even if he became a 50% owner, could not evict the existing tenant, who has lived in the building for 30 years and pays monthly rent of $525.82.  He has offered the tenant $45,000 to move out; the tenant countered with $70,000, which Koniuk says he cannot afford.

One anecdote with unfortunate facts does not make the case.  It is bad policy, though, to prevent the owner of a small residential building from evicting tenants to move in family members.  It puts the burden of affordable housing creation on the owner just because he is an owner, without regard to context.

Financial Crisis Resources

Later this week my real estate law class turns to the topic of real estate finance, from which it is a brief stroll–maybe even a short stumble–to sub-prime mortgages, collapse of the housing market, the worldwide recession, Wall Street malfeasance, borrower irresponsibility, mortgage broker greed, and all the other stuff that dominated the news a few years ago, but now is fading into the mists.  (Charles Ferguson’s remarks during his Academy Award acceptance speech for Inside Job show he hasn’t forgotten.)  A blessing of living in the information age is–duh–that there is lots of information.  A lot of crap, but a lot of gold–books like The Big Short by Michael Lewis, House of Cards by William D. Cohan, Too Big to Fail by Andrew Ross Sorkin, articles (all from Vanity Fair) like Michael Lewis’s Wall Street on the Tundra, The Man Who Crashed the World, and Beware of Greeks Bearing Bonds (the subject doesn’t matter–Lewis is always worth reading),  and podcasts.   Two, from This American Life, present clear and interesting overviews of sub-prime mortgage generation and securitization and their relationship to the capital markets:  The Giant Pool of Money, originally aired 9 May 09, and Return to the Giant Pool of Money, originally aired 25 Sep 09.

And videos.  A student recommended this terrific 11-minute animated explanation of the origins of the credit crisis.  As the accompanying notes acknowledge it leaves out a few things, but that’s a quibble.  It’s remarkably clear and concise.

Beware the Small Condo Association

There’s a great article in today’s Boston Globe Magazine titled Home Sweet Hell about the problems that can arise in condominium buildings with a small number of units.  Patricia Nelson, a real estate attorney quoted in the article, explains the problem clearly:

“In any organization, you get people with extreme views on the edges of the bell curve.  There are people who think that the minute the roof leaks, you have to replace the whole roof. Others would never want to replace the roof; all they ever want to do is patch. In a large association, the people on the edges are diluted by being with everyone else. It’s more likely that you’ll end up with something in the middle.”

But, as the article notes,  “in a small association, there are simply not enough members to soften the impact of the pain-in-the-neck outliers”–vivid examples of which the article provides.  The Boston condo market makes it likely one will encounter the dynamics described in the article:   of the 7,400 condominium associations in Boston “5,832 – or 79 percent – have fewer than five units.”  Friends of ours just moved from a beautiful, expensive, well-located condominium unit on Marlborough Street in part of because of their difficult neighbors.

Caveat emptor, condominium purchasers.

Semester Summary

Facts, insights, and musings from the spring 2010 semester.

  • Average grades:  Real Estate Law 87.9/3.35; Internet Law 88.9/3.41; Intro to Law 86.9/3.30
  • Number of A/A- grades: Real Estate Law 14/10 (27%/19%); Internet Law 19/7 (37%/13%); Intro to Law 16/7 (31%/13%)
  • Number of students who elected grading option B:  Real Estate Law 5/9.6%; Internet Law 5/9.4%; Intro to Law 10/21.3%
  • Number of students whose letter grade increased because of option B: Real Estate Law 4; Internet Law 2; Intro to Law 5
  • Number of students whose letter grade decreased because of option B: Real Estate Law 0; Internet Law 0; Intro to Law 0
  • Number of students who complained about or asked for the chance to do extra work to increase their course grade:  0  (this hasn’t happened in years)
  • The number of students who visited office hours was historically low this semester.  Some of my law faculty colleagues had the same experience.  Previous posts have speculated inconclusively why this is so.
  • I plan to scrap and rebuild real estate law by discarding the Jennings text and shifting to a case- and problem-based curriculum.  Real estate law does not pose as many broad and cutting-edge policy issues as Internet law, but it is filled with juicy family squabbles, obnoxious neighbors, vile slumlords, nasty tenants, greedy developers, over-reaching regulators, and other human-interest drama that was lacking from the text.  I’ve not resolved who best to feed the law to students–a custom outline of the relevant terms, concepts, and principles?  That will require lots of work for me to prepare.  A canned commercial law-school outline of real property law?  Possibly too broad, technical, and dry.  A Nolo.com law-for-non-lawyers handbook?  Good materials but too topic-specific, e.g. they deal only with landlord/tenant law, or buying a house.  Topic-specific web-based content?  I’ve not located one good authoritative site, so the material will be of piecemeal quality and consistency.  Right now I’m leaning towards the custom outline while continuing to explore the alternatives.
  • I completely overhauled Internet law last summer.  Changes for the 2010-2011 academic year will be less dramatic, mostly updating existing cases, blending more cases into the text (like Krinsky v Doe in the Anonymous Speech chapter), finding more recent and more interesting cases for a few topics, and adding transitions and expository material to the casebook.
  • Internet law topics that deserve more course time:  privacy, the DMCA, and licensing (including Open Source, Creative Commons).
  • I’m going to move the order of Intro to Law topics to put more course time into business organizations.  Some other topics will have to move to make this happen, although I don’t know what.