Real Estate Advisor Law Blog : Ohio Real Estate Lawyer & Attorney : Ulmer & Berne Law Firm : Columbus, Cleveland OH

With the current housing crisis, more individuals are voluntarily choosing to cease payments on their mortgages. This scheme, known as “strategic default,” is most common where the mortgage balance exceeds the home value. The phenomenon has fueled a rigorous debate, with some arguing it is immoral to default on a mortgage which is still affordable, and others taking the position that for some homeowners the “benefits” of willingly defaulting outweigh the consequences. 

A cost-benefit analysis as to whether a homeowner should strategically default is not as simple as it seems. Initially, a borrower’s credit score can plummet as much as 160 points. Although a foreclosure will stay on a credit score for seven years, its impact will lessen with time. Another risk depends on whether a homeowner resides in a non-recourse or recourse state. Non-recourse states forbid lenders to pursue borrowers for the money owed which exceeds the value of the home. Recourse states allow lenders to sue borrowers; yet, the overwhelming amount of foreclosures has lenders scrambling to stay afloat without the problem of pursuing defaulting homeowners. Finally, many defaulting homeowners wonder if they will be able to buy a home again. With a poor credit score, it can be difficult to buy a house. But financial institutions across the nation specialize in “mortgage repair” which targets homeowners who have recently defaulted on a mortgage.

Even with the uptick in the current crisis, it is surprising how few homeowners choose to default strategically. Luigi Zingales, author of “The Menace of Strategic Default” in a recent issue of the City Journal, argues this is due to moral implications: “the idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded. What does prevent people from strategic default, it seems, is their sense of what’s right.” Zingales feels social norms have a direct impact on whether an individual chooses to default or not; i.e. knowing someone who has done it makes you more likely to do it.  

On June 10, in response to the wave of mortgage defaults (strategic or otherwise), a Federal Housing Administration (FHA) reform bill passed the U.S. House of Representatives with a 406 to 4 vote. The FHA Reform Act (H.R. 5072), among other goals, seeks to withdrawal FHA approval from lenders with abnormally high default rates.  The bill has organizational support from those such as Robert E. Story, Jr., Chairman of the Mortgage Bankers Association, who hopes the bill “will allow FHA to address lender enforcement without discouraging responsible lenders from participating.”

Although homeowners may individually benefit from strategically defaulting, it raises an additional obstacle to the recovery of the broader housing market.  When a neighbor defaults, home values in the vicinity plummet and mortgage prices increase as lenders cover default costs. Yet, what is to prevent an individual owner making a rational financial decision that it is better to breach than continue paying on a mortgage balance that substantially outweighs home value?  Perhaps the idea of opportunistic, or willful, breach has trickled down to the American consumer.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Ohio House Bill 292, which prohibits the future creation of transfer fee covenants, was signed into law on June 14, 2010 and will become effective on September 13, 2010. Transfer fee covenants in effect prior to September 13, 2010 are not affected by the new law.

Transfer fee covenants create revenue streams for real estate developers. A transfer fee covenant is created by a seller (the “Covenantor”), usually a real estate developer or builder. It requires subsequent buyers of the Covenantor’s grantee to pay a transfer fee back to the original Covenantor each time the property is sold. Transfer covenant fees generally range from 1% to 3% of the purchase price of the property and are payable to the Covenantor. 

Covenants often provide for a lien in favor of the Covenantor if the transfer fees are not paid. If recorded, the lien makes financing for future purchasers difficult because the lien created by the transfer fee covenant takes priority over the interest of a subsequent lender.

Transfer fee covenants may create problems for subsequent owners. The covenants require subsequent owners to pay the transfer fee to the original Covenantor, but as time passes, it may be difficult to determine to whom and where the fee should be paid. Transfer fee covenants also pose potential title problems because the covenant may only be contained in the original deed and could be missed during a title exam if the exam covers a shorter period of time than the typical 99-year existence of a transfer fee covenant.     

Creditors should obtain thorough title exams prior to issuing a loan or proceeding with a foreclosure action to avoid any potential problems created by existing permitted transfer fee covenants.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In what has become an ongoing series here on the UB REAL Blog, we wanted to issue another update on the now year old Cuyahoga County Land Reutilization Corporation, better known as the land bank.  Over the past six months, the Cuyahoga County Land Bank has obtained more properties and received millions in funding from the federal government.

A South Euclid lot donated to the Cuyahoga County Land Bank is soon to become one of the program’s community gardens. As of January 13, 2010, the property is the first of its kind to complete both the acquisition and disposition processes. The 50x108 lot, located at 3915 Warrendale Road, was given a market value of $22,800.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The current economic downturn and the contraction of the retail sector have resulted in an increasing number of vacant “big box” retail stores in shopping centers across the country. A “big box” is a freestanding building occupied by a single retail tenant that contains between 20,000 to 200,000 square feet of space and is surrounded by a large parking area. Big box structures are designed to house large inventories in an efficient and cost-effective manner. They are constructed to the meet the specific needs of the big box tenant. Examples of big box retailers include Wal-Mart, Target, Costco, and Home Depot.

As the number of vacant big boxes increases, owners, developers, and communities are faced with the challenge of what to do with them. Big boxes have been redeveloped into libraries, community centers, charter schools, churches, museums, and civic centers. While this redevelopment is promising, churches, schools, and other public uses generally are exempt from real estate taxes and they do not generate sales taxes. Ideally, the new use of the big box space will generate sales and property taxes as the big box retailer did, but oftentimes, this is not the case. The failure of a re-use tenant to generate sales and property taxes further contributes to the already daunting fiscal challenges faced by many local communities. Lower rent tenants, such as discount retailers and grocers, are also options for reuse of vacant big box space but owners may be concerned that lower rent tenants may devalue the property.

Redeveloping vacant big boxes present special challenges to communities, owners, and prospective tenants. Leases or deed covenants may contain restrictions that may impact the ability to re-lease the property. Zoning and land use issues may impede or constrain the future use of the space. Co-tenancy clauses in leases of other tenants in a center may result in tenants abandoning a center if a big box tenant vacates its space thereby triggering a landlord default under the lease.

While creative ideas for the reuse of vacant big box spaces exist, it will take the support of local governments and communities as well as available financing to make the redevelopment of these big boxes work.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Truckloads of sand will begin cascading across hurricane-battered beaches along the Destin and Walton County shorelines, thanks to a recent 8-0 decision by the Supreme Court. Coastal homeowners originally sued Florida arguing that the Beach Erosion Control Program (BECP) would cause the value of their homes to decline, turning their “oceanfront” property into “ocean view” property. Much to the dismay of residents, the Court ruled that the state may extend the eroded shorelines without compensating the homeowners for loss of private property.

The homeowners in Stop the Beach Renourishment v. Florida Department of Environmental Protection (#08-1151) claimed that widening the beach without compensating the residents amounted to an unlawful taking of private property for public use. Although residents believed their land was unlawfully taken, a state law permits Florida to add sand to eroding beaches. Under this law, the state is permitted to increase the size of the beach and claim ownership of the new addition. All eight justices (Justice Stevens recused himself, likely because he owns oceanfront property in Ft. Lauderdale which is also under consideration for a BECP project) agreed that such action did not constitute a compensable taking.  Justice Scalia, writing for the Court, noted that the case turned on two Florida property law principles:  “First, the State as owner of the submerged land adjacent to littoral property has the right to fill that land, so long as it does not interfere with the rights of the public and of littoral landowners. Second, if an avulsion exposes land seaward of littoral property that had previously been submerged, that land belongs to the State even if it interrupts the littoral owner’s contact with the water.” The Court concluded that since “the Florida Supreme Court’s decision did not contravene the established property rights of the petitioner’s members, Florida [did not violate] the Fifth and Fourteenth Amendments.”   

Doug Kendall, spokesman for the Constitutional Accountability Center, agreed with the decision, stating that “the Court’s ruling supports Florida’s efforts to restore eroded beaches and preserves the ability of state and local governments to respond to changing environmental conditions. It is crucially important that the government have the authority to step in to protect our beaches and coastal communities.”

While some may see this as an extension of recent Supreme Court decisions -- ala Kelo -- expanding the right of government to take private property for public use, Stop the Beach is actually a unique case that will likely have little impact on future takings jurisprudence.  It arose from distinctive circumstances addressing littoral property under a Florida statute permitting erosion control actions by the state.  And when Scalia sides with the state in a takings case, you can be sure the scope of victory is limited.

• Email This
• Print
• Comments
• Trackbacks
• Share Link