No One Saw It Coming - again Systemic Risk And State Foreclosure Proceedings: Why A National Uniform Foreclosure Law Is Necessary

=1749609. 2012] UNIVERSITY OF MIAMI LAW REVIEW deficiency judgment. In some cases, an appeal may follow. ' 78 Judicial foreclosure is often a long and costly process. The remaining thirty-three states and the District of Columbia utilize a non-judicial process that tends to be shorter in duration, substantially less complicated, and less costly than its judicial counterpart. 79 "After varying degrees of notice, the mortgaged property is sold at a public sale by a disinterested third party, such as a sheriff or a trustee or by the mortgagee. ' 8° After completion of the foreclosure sale, twenty-two states provide a "statutory redemption" period during which the mortgagor-debtor and, in many instances, junior lien holders can "regain title after the foreclosure sale by paying the foreclosure purchaser the sale price plus accrued interest and other expenses."81 This period can be as long as a year and may be available in both judicial and non-judicial foreclosure. 82 For a homeowner, probably the most important disparity in foreclosure laws among states is the personal liability of the borrower and post-foreclosure deficiency judgments. In many states, a lender may foreclose on the home first and then pursue a deficiency judgment, which is usually the difference between the foreclosure sale price and the mortgage debt.83 Foreclosed homes seldom fetch enough to cover the outstanding loan amount. This is because buyers may have financed up to 100% of the value of the property during the housing boom and because today's foreclosures take place following a four-year decline in home values. In some states, this decline exceeds 50%.84 A few states prohibit any personal liability on purchase-money mortgage obligations.85 In that setting, the mortgage obligation is simply non-recourse as a matter of law.8 6 Twenty-one states use "fair market value" legislation to limit the deficiency to the difference between the mortgage debt and the fair value of the foreclosed real estate, rather than 78. Grant S. Nelson, Confronting the Mortgage Meltdown: A Brief for the Federalization of State Mortgage Law, 37 PEPP. L. REV. 583, 588 (2010) (footnote omitted). 79. Id. at 3-4. 80. See Nelson, supra note 78, at 588-89. 81. See Nelson & Whitman, supra note 72, at 1404 & n.21. 82. See id. at 1403-04. See also, e.g., CAL. Civ. PRoc. § 729.030 (West 2012) (nonjudicial foreclosure; three-month to one-year period of post-foreclosure redemption); IOWA CODE § 628.3 (2012) (judicial foreclosure; one-year period). 83. See JOHN RAO & GEOFF WALSH, FORECLOSING A DREAM: STATE LAWS DEPRIVE HOMEowNERs OF BASIC PROTECTIONS 3-4, 38-40 (2009), available at http://www.nclc.org/ images/pdf/pr-reports/report-foreclosing-dream.pdf. 84. See Press Release, CoreLogic, July Home Price Index Rises 3.8 Percent Year-OverYear-Biggest Increase Since 2006 (September 4, 2012), http://www.corelogic.com/about-us/ researchtrends/assetuploadfile84l_1 6445.pdf. 85. See id. at 5, 38-40. 86. See id. [Vol. 67:41 NO ONE SAW IT COMING-AGAIN the difference between the debt and the foreclosure sale price.87 The findings of a recent study substantiate that the disparity in laws among the states creates non-competitive and unfair markets for consumers. Researchers found that consumers in non-recourse states were approximately 30% more likely to default.88 Furthermore, for homes appraised at $500,000 to $750,000, borrowers are more than twice as likely to default in non-recourse states.89 Borrowers faced with a deficiency judgment may find themselves at the mercy of a lender who may or may not consider negotiation or mitigation. Or worse, banks may sell their deficiency judgments to collection agencies that may relentlessly pursue a borrower to collect the amounts still owed after foreclosure until the statute of limitations runs (twenty years in Florida).90 Collection agencies are seizing money from checking/savings accounts, garnishing wages, and seizing other assets owned by the borrower in order to satisfy the deficiency judgment, thereby prolonging the financial nightmare for these families.91 Over the years, Fannie and Freddie have required the use of dozens of note and mortgage forms designed to create some semblance of mortgage law uniformity.92 Congress has also enacted legislation on a wide variety of substantive and procedural mortgage law issues. The state mortgage foreclosure system places substantial roadblocks and inefficiencies in the path of a satisfactory federal resolution of the mortgage crisis. Millions of home mortgages will have to be foreclosed in spite of mitigation attempts. Federal interests will be served by a uniform foreclosure process that is both efficient for the government and fair to borrowers. Before there can ever be a significant return of private investment in the mortgage market, it will be crucial that the market's need for certainty in the foreclosure process be met. Historically, capital generated by sales of MBSs to investors has resulted in the increased availability and lower cost for the residential and commercial markets. Prior to the housing collapse, private label securitization accounted for about 50