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New Formalism in the Aftermath of the Housing Crisis Nestor M

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New Formalism in the Aftermath of the Housing Crisis Nestor M Fordham Law School FLASH: The Fordham Law Archive of Scholarship and History Faculty Scholarship 2013 New Formalism in the Aftermath of the Housing Crisis Nestor M. Davidson Fordham University School of Law, [email protected] Follow this and additional works at: http://ir.lawnet.fordham.edu/faculty_scholarship Part of the Bankruptcy Law Commons, Law and Society Commons, and the Property Law and Real Estate Commons Recommended Citation Nestor M. Davidson, New Formalism in the Aftermath of the Housing Crisis, 93 B.U. L. Rev. 389 (2013) Available at: http://ir.lawnet.fordham.edu/faculty_scholarship/576 This Article is brought to you for free and open access by FLASH: The orF dham Law Archive of Scholarship and History. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of FLASH: The orF dham Law Archive of Scholarship and History. For more information, please contact [email protected]. NEW FORMALISM IN THE AFTERMATH OF THE HOUSING CRISIS NESTOR M. DAVIDSON* INTRODUCTION ............................................ 390 1. INTHE AFTERMATH: THE HOUSING CRISIS INTHE COURTS................ 396 A. The System Breaks Down ...................... ...... 396 1. A Snapshot of the Housing Boom and Bust.... ....... 396 2. The Structural Interface Between Primary and Secondary M ortgage M arkets................................................ 399 B. Patternsin the Ensuing Mortgage Distress Jurisprudence.........402 1. Formalism Emerging .......................... 403 a. Standing, Chain-of-Assignments, and Other Challenges in JudicialForeclosures .............................. 403 b. Bankrup tcy ...................................................................... 405 c. Non-JudicialForeclosures ............................................. 406 2. Anticipations of, and Reactions to, Formalism .... ..... 408 a. MERS in the Courts ............................. 408 b. Banks and Servicers React: The Problem of "R obosigning"................................................................ 409 3. Sum m ary and Perspective ..................................................... 411 II. FORMALISM AND FLEXIBILITY IN MORTGAGE LAW............................ 413 A. The Law-Equity Divide in Mortgage History.............................. 414 1. Law and Equity's Original Polarities .................................... 414 2. Contem porary Echoes ........................................................... 416 B. The Ineluctable Irony ofLender Antiformalism .......................... 418 1. R eversing the Polarity ........................................................... 418 2. Informality and Liquidity: Securitization as Antiformalism ............................................421 III. NEW FORMALISM CONSIDERED.. ................................. 423 A. Explaining the Formalist Turn ....... ................. 423 . ...... 1. Is Everything Old New Again? . ... ...... 423 Professor, Fordham University School of Law. For helpful comments on earlier drafts, the author thanks Greg Alexander, Michelle Anderson, Jane Baron, Bethany Berger, Andrea Boykin, Anupam Chander, Eric Claeys, Hanoch Dagan, Annie Decker, Rashmi Dyal- Chand, Sheila Foster, Clare Huntington, Gerald Korngold, Joseph Singer, and Dale Whitman, as well as participants in the Association for Law, Property, and Society Annual Conference at Georgetown University Law Center, the Northeastern University School of Law Faculty Colloquium, and the Progressive Property Conference at Harvard Law School. Remy Roizen, Brittany Robbins, and Robert Sanchez provided excellent research assistance. 389 390 BOSTON UNIVERSITY LA WREVIEW [Vol. 93:389 2. Vital and Direct Consumer Protection..... ................ 425 3. Procedural Leverage for Substantive Reform........................ 426 B. Concerns and Consequences .................. ..... 429 1. The Legacy of New Formalism......... ..................... 430 a. Brittleness ........................ ...... 430 b. Mismatch ......................... ...... 431 c. Distraction ................................. 433 2. A Frame for Evaluating Housing-Finance Reform ............... 435 C. Coda: The Crystal This Time?... ............................. 438 CONCLUSION. ................................................... 440 The housing crisis has left in its wake an ongoing legal crisis. After housing markets began to collapse across the country in 2007, foreclosures and housing-related bankruptcies surged significantly and have barely begun to abate more than six years later. As the legal system has confronted this aftermath, courts have increasinglyaccepted claims by borrowers that lenders and other entities involved in securitizing mortgages failed to follow requirements related to perfecting and transferring their security interests. These cases - which focus variously on issues such as standing, real party in interest, chains of assignment, the negotiabilityof mortgage notes, and the like - signal renewedformality in nearly every aspect of the resolution of mortgage distress. This new formalism in the aftermath of the housing crisis represents something of an ironic turn in the jurisprudence.From the earliest history of the mortgage, lenders have had a tendency to invoke the clear, sharp edges of law, while borrowers in distress have often resorted to equity for forbearance. The post-crisis caselaw thus upends the historical valence of lender-side formalism and borrower-sideflexibility. Building on this insight, this Article makes a normative and a theoretical claim. Normatively, while scholars have largely embraced the new formalism for the accountability it augurs, this consensus ignores the trend's potential negative consequences. Lenders have greater resources than consumers to manage the technical aspects of mortgage distress litigation over the long run, and focusing on formal requirements may distractfrom responding to deeper substantive and structuralquestions that still remain largely unaddressedmore than a half decade into the crisis. Equally telling, from a theoretical perspective, the new formalism sheds light on the perennial tension between law's supposed certainty and equity's flexibility. The emerging jurisprudence underscores the contingency ofproperty and thus reinforces - again, ironically - pluralist conceptions of property even in the crucible of hard-edged formalism. INTRODUCTION The aftermath of last decade's housing boom and bust has generated an ongoing legal crisis. In the ten years prior to 2007, mortgage delinquencies 2013] NEW FORMALISM AFTER THE HOUSING CRISIS 39 1 averaged 4.7% annually, and the foreclosure start rate in that same period was a relatively low 0.42%.1 After the housing crash, mortgage delinquencies increased to a January 2010 high of 10.57%,2 and although they have dropped since then, more than a quarter of all homeowners currently owe more on their mortgages than their homes are worth.3 Not surprisingly, nearly four million homes have gone through foreclosure since 2008,4 and the percentage of outstanding loans in foreclosure continued through the end of 2012 to be at a historically high average rate of just over 3.5%.5 Thus, even as the economy has begun to recover, foreclosures and housing-related bankruptcies continue to roil the legal system. As borrower advocates have responded to this surge in mortgage distress, they have found success raising a series of largely procedural defenses to foreclosure and mortgage-related claims asserted in bankruptcy. These challenges have focused on issues such as lender or servicer standing, real party in interest, faults in the chain of mortgage and note assignment, and notice requirements, the bulk of which reflect problems in the process of 1 See U.S. DEP'T OF Hous. & URBAN DEv., U.S. HOuSING MARKET CONDITIONS 78 tbl.19 3 (2009), available at http://www.huduser.org/portal/periodicals/ushmc/fall09/USHMC-Q 09 .pdf. For data on foreclosure-related bankruptcies (compiling data from the Mortgage Bankers Association's National Delinquency Surveys), see infra note 41. 2 LENDER PROCESSING SERVS., LPS MORTGAGE MONITOR: DECEMBER 2012 MORTGAGE PERFORMANCE OBSERVATIONS 6 (2012), available at http://www.lpsvcs.com/LPSCorporateI 20 nformation/CommunicationCenter/DataReports/MortgageMonitor/ 1211 MortgageMonitor /MortgageMonitorNovember20l2.pdf (tracking loan-level data). The delinquency rate as of the end of December 2012 was 7.17%, a drop from the December 2011 rate of 9.11%. Kerri Ann Panchuck, Mortgage Delinquencies Tick up in December, HOUSINGWIRE (Jan. 13, 2013, 8:19 AM), http://www.housingwire.com/news/2013/01/23/mortgage-delinquencies-tic k-december. Dino Grandoni, 29% of U.S. Homes Underwater (Figuratively),ATLANTIC WIRE (Nov. 8, 2011), http://www.theatlanticwire.com/national/2011/11/29-us-homes-are-underwater-fig uratively/44699/. 4 Press Release, CoreLogic, CoreLogic Reports 55,000 Completed Foreclosures in November (Jan. 3, 2013), available at http://www.corelogic.com/about-us/news/corelogic-r eports-55,000-completed-foreclosures-in-november.aspx. s LENDER PROCESSING SERVS., supra note 2, at 6. At the peak (or, perhaps, nadir) of the foreclosure crisis, in the fourth quarter of 2010, the average foreclosure rate on outstanding mortgages nationwide was 4.6%. Press Release, Mortg. Bankers Ass'n, Delinquencies and Foreclosures Decline in Latest MBA Mortgage Delinquency Survey (Feb. 16, 2012), 982 7 available at http://www.mortgagebankers.org/NewsandMedia/PressCenter/7 .htm. These average figures obscure the depth of the crisis in particular
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