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Notes -
Court opinion somewhat relevant to the culture war:
According to lawmakers: "New Jersey is consistently in the top three in the nation with the highest foreclosures. Our state also has the widest racial wealth gap in the country. Black and brown wealth is hemorrhaging through the loss of foreclosed property, and the people who live in the community often do not have deep enough pockets to even participate in the foreclosure process." "The current process favors companies that have the money to purchase property at sheriff sales and resell it for a profit." In response to these concerns, the state govt. enacts a law ensuring that, whenever a residential property is foreclosed on, a right of first refusal is granted to the owner, his next of kin, and his tenants (if the owner is an individual rather than a company), and a right of second refusal is granted to certain redevelopment-oriented nonprofits (regardless of the owner's identity). Normally, foreclosure results in an auction starting at an "upset price" (minimum/reserve price) set by the foreclosing lienholder (presumably the lender of the property's first mortgage). However, these two new rights of refusal allow the property to be purchased for the upset price without an auction. The lawmakers say: "This legislation will help to keep property ownership within the community." "This is what equity in systems looks like."
However, the new law causes problems because it often results in undervaluation of the property, so that junior lienholders don't get paid back. For example, in one of the cases consolidated here: A residential property with estimated fair market value of at least 680 k$ was foreclosed on. US Bank held a first mortgage for 281 k$, and PNC Bank held a second mortgage for an amount that I can't find in the court documents. US Bank set the upset price at 309 k$. PNC was prepared to bid the auction up to 401 k$, which presumably would suffice to pay off both mortgages. However, instead a nonprofit exercised its right of second refusal and bought the property at the upset price of 309 k$, paying off US Bank's mortgage but leaving PNC with substantially less than what it would have gotten at auction. In PNC's words: "The refusal to recognize other bids results in illegal lien-stripping and the illegal taking of substantial surplus that would have been realized, and the deprivation of PNC's property interest that would have attached to that surplus." (PNC also alleges that the nonprofit is a sham. It was created just a few days before the auction would have taken place, and is not registered as a nonprofit with the state govt. or with the federal IRS.)
The trial judge rules that the nonprofits' right of second refusal is an unconstitutional taking without just compensation, and the appeals panel affirms. The federal Supreme Court recently found that it is unconstitutional for the govt. to foreclose on a property for a 200-k$ tax delinquency, sell it at auction for 300 k$, and pocket the extra 100 k$. Likewise, if a property is encumbered with a 300-k$ mortgage, it is unconstitutional for the govt. to let a nonprofit buy it for 200 k$ and magically extinguish the extra 100 k$ of debt owed to a lender. (Nobody has invoked the owner's, next of kin's, and tenants' right of first refusal, so it technically is not at issue in this case. But if the right of first refusal is challenged in the future it presumably will be held unconstitutional under the same rationale.)
By the way, I've been thinking about this situation a little more and another interpretation occurred to me. I noticed that out the law's 6 sponsors, 5 are black. Perhaps the actual point of the law is to protect their constituents from predatory lenders.
I mean, they can't really propose a law that would explicitly ban home equity loans to working class black people who own homes that have appreciated in value over the years. But this law would appear to achieve basically the same thing.
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Is that how "right of first refusal" usually works? I was under the impression that they would run the auction as normal, then take the $410k (or whatever) bid to the family/charity and give them the chance to overrule the otherwise-winning bidder.
The participants in the auction might not like that their highest bid got rejected, but that's just business.
In this case, that's (apparently) not how it works. As I understand things, the lender who is foreclosing the loan gets to set what is called an "upset price" which is the minimum price the auctioneer is allowed to accept.
So for example, suppose there is a house with a market value of somewhere around $600k and nobody knows what it will bring in at auction, perhaps somewhere between $500k and $700k, but who really knows. The mortgage lender is foreclosing and the outstanding balance on the (first) mortgage is $400k. So the lender might set an "upset price" of $425k so that if the house sells at auction, the bank knows it will be made whole. If nobody bids $425k or higher, the bank can just bid the $425k itself, end up with the deed to the house, and try to sell the house at a later date on the open market.
On the other hand, suppose the bank sets an upset price at $425k but the house ends up going for $600k. That's great news if you hold a second mortgage because it means that after the foreclosing bank gets paid, there is money left over to pay the debt you are owed.
Anyway, under the law, this sketchy non-for-profit gets to buy the house for the "upset price" of $425k even if there were bidders who were willing to pay $600k. Which is fine for the bank that's foreclosing, but if you are a second mortgage holder, you're screwed. It means hundreds of thousands of dollars which would have gone to you are now, in effect, transferred to this sketchy not-for-profit.
Under these rules, why would anyone who is not the holder of the first mortgage grant the property owner the second mortgage?
Typically, I would expect that the total mortgages on a property are generally less than the house is worth (aside from market fluctuations). But then it would be in the interest of the owner to sell of the property before it gets foreclosed upon, so they at least make the difference between the sale price ant the outstanding mortgages back rather than nothing.
Yes, in my view, there is a strong disincentive. And in fact I hypothesized elsewhere that this is the actual point of the law: To ban working class homeowners from taking out loans which are not in the homeowners' best interests and are often predator in nature.
Yeah, and I think that foreclosures are strongly correlated with significant drops in the real estate market.
But still, this law would (arguably) offer distressed homeowners another option: Allow the house to go into foreclosure and then buy it back at the upset price with financing from another lender.
I think the actual point of the law was to allow lefty NGOs to get homes, though whether they'd move Democrats into them in a reverse-gerrymandering maneuver or just resell them for profit in an ordinary corruption maneuver could go either way in New Jersey.
Well what do you make of the fact that (apparently) anyone and his brother can just set up a not-for-profit and take advantage of the law? Since you are apparently familiar with New Jersey, you probably know which town in Ocean County would end up having 20 or 30 sketchy "community investment" non-profits set up. Is this something the lawmakers failed to consider? I don't know. The whole law seems pretty half-baked to me.
I don't know much about Ocean County (though I assume you're referring to Lakewood), but I'd expect any such law to be taken advantage of by local networks of corrupt people, whether that was intended or not.
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In this case, no, but we have to understand that NJ specifically did the thing where they label it ROFR but it operates totally differently. In the standard understanding, ROFR would be the option to purchase the property at the winning auction bid.
Agreed. In a way it's misleading to call it a right of first refusal. Arguably it should just be called an "option."
It's not even an option in any traditional sense. It pegs the option to the auction's strike price, which is nonsensical.
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As a side note, it seems like this New Jersey law (before it got struck down) was an open invitation for people to engage in this kind of fraud.
As a second side note, I have to ask: If this law had not been struck down, what bank would ever write a HELOC or other loan secured by a second mortgage? Maybe I don't understand the law correctly, but it seems like it's almost guaranteed that if the first mortgage is foreclosed for any reason, the remaining equity will get stripped away.
Basically, it seems like this is a case of liberal legislators not thinking carefully about the incentives they are creating. But maybe I am missing something.
Yet another one of the Great Moments in Unintended Consequences. If only politicians were mandated to demonstrate second-order level thinking.
It's terrifying how many bad laws are written because they think there's a magical button to fix a problem with no downstream effects. (Assuming they did this out of incompetence rather than malice.)
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Yeah, the way the law was written, it appears a homeonwer could get a second mortgage, default on the first mortgage, exercise the right of first refusal on the sale, and get the property free and clear of the second mortgage. They'd still owe the second mortgage but they could default on it or even declare bankruptcy (if they dumped all their assets into paying the upset price).
Wouldn't the pursuit of a judgment from the second mortgage (or bankruptcy proceedings, if they're taking that route) just lead to the house being sold?
edit: ok, no, I guess if you default on the mortgage they can't force a sale of the house. I'm pretty sure bankruptcy can lead to it being sold though.
Primary residences have some protection against bankruptcy, though this trick probably works better if you have a relative exercise the right of first refusal.
From what I can tell, in chapter 7 they protect a certain amount of equity on the home: if your equity in the property is less than the legally specified amount, which in New Jersey is 63,150 for a spouse-jointly-owned home, they won't trigger a sale. The original intent seems to be "it's not going to make a significant difference in your debts anyway, so we're not going to bother", although I don't know if subsequent legislation raised it to a point where banks would want to trigger a sale if they could.
That wouldn't be super applicable here, since under this system you'd own the home outright and have the full value of the home in equity. It would work only for very low-value homes where the full value of the house is under the exemption(which might also be hard to get any significant second mortgage on). I'm not actually sure you could use the right of first refusal to have multiple people purchase a house, as well, which might mean you end up with half that amount of equity.
In Chapter 13 it seems like you can keep your house as long as you maintain your payment plan, but they can take it if you fall behind. So you might be able to negotiate some sort of discount, but that requires convincing creditors and/or a judge, and with a newly paid-off house sitting there it might raise some eyebrows.
So I do think you need a cutout here: one person defaults on the first mortgage, the relative uses right of first refusal to snap up the house, and the original homeowner just declares bankruptcy with no remaining assets.
Looping in @The_Nybbler since he's party to this discussion.
I did bankruptcy law fora couple years so I can outline how the process typically works. It's worth pointing out at the beginning the difference between unsecured and secured debts. Unsecured debts, like credit card debt or personal loans, are secured only by the borrower's promise to pay. If the borrower defaults, the lender can attempt to collect the debt, sue and obtain a judgment, and attempt to enforce that judgment through various mechanisms provided by the law. A secured debt includes an additional element where the borrower pledges specific property that the creditor can seize in the event of nonpayment. When a creditor initiates a court action to seize property for payment of debts, state law establishes who gets priority when it comes to payment. Generally speaking the earlier recorded interests get priority, but various policy considerations make this a bit more complicated (for example, taxes and HOA fees almost always get top priority regardless of when they were accrued). Chapter 7 bankruptcy extinguishes the personal obligation to pay, but it does not extinguish security interests. To that extent, the liquidation of the bankruptcy estate is only concerned with assets that can be liquidated to pay unsecured creditors. Additionally, one of the policy goals of bankruptcy is to give the debtor a fresh start, not to leave him destitute, so certain small amounts of assets can be exempted from liquidation as set forth by law.
With that out of the way, let's look at a typical Chapter 7 scenario: Debtor owns a home worth $300,000, subject to a first mortgage with a balance of $200,000 and a HOLC with a balance of $50,000, leaving the debtor $50,000 in equity. The mortgages are current and the property is not in foreclosure. Debtor also has $50,000 in unsecured credit card debt, and no other assets worth mentioning. If the available exemption is $63,150, then it covers the debtor's $50,000 in equity. The trustee classifies the case as "no asset" and the credit card companies get nothing, and the debtor is not required to pay them. As for the mortgages, the debtor is no longer personally obligated to pay them, but they still secure the property, meaning that if the debtor doesn't continue to pay them after the discharge then the bank can foreclose. The practical effect of the discharge, however, means that foreclosure is the only remedy available to them; if the foreclosure sale does not cover the loan, they can't pursue the debtor individually.
When you talk about "triggering a sale", keep in mind that sales are never "triggered" in a Chapter 7 bankruptcy; sale of an asset is wholly within the discretion of the trustee. The more important thing to keep in mind—and I'm not sure if you were insinuating this but I want to make it clear just in case—is that secured creditors play little to no role in the bankruptcy process. The most obvious interaction I can think of is that mortgage payments will be rolled in with Chapter 13 payments, but they won't be reduced like other debts might be. The other one is that if there are any pending or potential foreclosure actions they will automatically be stayed upon filing. This is of little consequence in a Chapter 7 because the stay will be lifted upon discharge, which only takes a few months, and if the bank is impatient they will almost always get the stay lifted if they ask the court. The only consequential involvement of secured creditors in the bankruptcy process is when a debtor in mortgage arrears files Chapter 13, which allows him to repay the arrears under the payment plan.
But in the situation we're talking about with the New Jersey law, we'd end up in a situation in which of the two mortgages on the property, only the first one is paid off (because the first bank is only incentivized to set an upset price that makes them whole, and the second bank isn't capable of outbidding the family because of the right of first refusal). I'm pretty sure the unpaid second mortgage can't follow the property, but it still wasn't paid.
In this situation, does the second mortgage just disintegrate, or does the bank holding the second mortgage have a way to pursue a judgment against the homeowner for the unpaid debt? If so, how does that interact with a subsequent bankruptcy by the homeowner, keeping in mind that the homeowner would have a house with no mortgages attached to it and thus probably be past the equity number for an exemption?
The New Jersey law would strip the second lien, but it wouldn't absolve the debtor of the requirement to pay the note. The creditor could sue the debtor for nonpayment and get a recorded judgment, which would allow them to garnish wages, levy bank accounts, and, yes, attach a judgment lien to the debtor's property. While it sounds like they get their mortgage back, this is more of a consolation prize, because in any foreclosure action they would be junior to any real mortgages, including ones that were recorded after the judgment lien. They would also be junior to any mechanic's liens. Effectively, they're now at the bottom of the list. If the debtor receives a bankruptcy discharge at any point in this process, it would eliminate their obligation to pay anything. The only exception would be if the creditor obtained a judgment and recorded a judgment lien against the property before the creditor filed. Then the lien would remain, though the personal obligation would be extinguished and they couldn't continue any other collection activities.
I apologize because it's only now that I'm wrapping my head around what you guys were talking about; before I was just trying to give some general background on how bankruptcies work. Suppose the house is worth $400,000. Mortgage 1 is $200,000 and Mortgage 2 is $100,000. Under the NJ law, Mortgagor 1 initiates a foreclosure action with an upset price of $200,000. Per the law, the owner exercises his right of first refusal and buys the house at the upset price, stripping Mortgage 2. Mortgagor 2 now has a note worth $100,000 but no security interest in the property. Mortgagor 2 then sues the owner for nonpayment of the note, but the owner files for Chapter 7 bankruptcy before judgment is entered, staying the suit. There are no other liens on the property at this point, and the owner's only debt is the $100,000 he owes to Mortgagor 2. After applying the exemption, the trustee has $336,850 available to distribute to unsecured creditors, which easily covers the $100,000 owed to Mortgagor 2. The property is sold for $400,000, $100,000 of which goes to Mortgagor 2, $100,000 goes to the trustee's commission, and $200,000 of which goes back to the owner. Maybe this counts as "abusing the system" in a strict technical sense, but like most such abuses, you'd have to be really stupid to think you're getting one over on anyone.
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In theory, the bank could sue on the note just like a credit card company can sue you if you don't pay your credit card bills. In practice, those kinds of lawsuits usually don't accomplish much because most people don't have assets which can be seized. Which is why credit card companies usually end up settling for pennies on the dollar.
Let's suppose that the bank holding the second mortgage gets a judgment which then becomes a lien on the original property. I'm pretty sure that this is nowhere near as good as having a mortgage. For one thing, there may be a homestead exemption. For another, it's difficult or impossible to convince a sheriff to actually seize the property in that situation. Usually you will be told to just wait for the person to sell or otherwise transfer the property.
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Do Americans not have laws against organizing your own insolvency?
I think there are definitely laws which could be used to fight against the sort of abusive transactions @Nybbler is proposing, but (in my opinion) it would still be a big problem for a potential lender on a second mortgage. It's sort of like the situation where someone squats in your house illegally and the police tell you that your remedy is to file a civil lawsuit against the squatter. Yes, you have a remedy but that remedy is expensive, time-consuming, and could take months or even years to get results.
In the case of this law, I think it's kind of the same. Second mortgagees are losing a remedy which is (relatively) simple, clean, and effective and receiving one which is complicated, time-consuming, and uncertain.
From the bank's perspective, arguably the reason they are willing to loan you hundreds of thousands of dollars at a modest interest rate is because they know that whatever happens, there's equity in the house which secures their loan.
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That's the generous take. The more cynical/realistic one is that they deliberately want to encourage exactly this kind of behavior as an under-the-table giveaway to the non-profits, which will be kicked back to them in various forms. And if other disreputable people want to engage in fraud, well, that's just fine.
More generally, it is past time for major reform (or possibly just the abolition) of non-profits/NGOs.
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Hilariously, this law was watered down from an earlier bill that would have capped the upset price at just 50 percent of the mortgage! (The text isn't clear as to whether it's referring to the first mortgage or to all mortgages combined.) This original version was passed by the legislature, but was vetoed by the governor.
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On the topic of 5th amendment violations
If this right of second refusal is an unconstitutional taking of the financial interests of the mortgage-holders, it seems pretty straightforward to me that rent control is an unconstitutional taking of the financial interests of property owners, and I have no idea how we've managed to get this far without a court ruling to that effect.
The Supreme Court has ruled unanimously that rent control is not an unconstitutional taking because the owner is renting voluntarily. He can just stop renting and sell the property if he wants to.
This seems obviously bogus to me because the value of the property depends on your ability to commercially exploit it. If a new regulation reduces or destroys your ability to commercially exploit the property, the value of the property is now obviously lower, it will not be worth as much to anyone who would buy it. I cannot see how the lost value of your property is not a taking!
The issue courts have seen with this logic is that vast swaths of regulation lower the value of property, including longstanding practices like zoning and setbacks and even nuisance. A property might indeed be more valuable if the owner can store cars on the front lawn or dam a stream.
Where I think the line is currently drawn is that regulation cannot completely extinguish the value of a property and it can't be specifically targeted. That's a workable legal one, but probably a suboptimal policy.
[ BTW, that court case is actually a pretty good example of bad facts making bad law. A mobile home situation is one where the "renter" owns the home on top of the pad and is substantially invested in an asset that costs more to move than it's worth. This is probably one of the strongest cases for how a landlord/tenant situation can be financially coercive because the realistic cost to the tenant of moving out is giving up a huge asset. ]
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I see a couple issues with this.
First, a new (restrictive) regulation might actually increase the value of your property if it applies to other properties in your area. So for example, suppose you own a brownstone in a "historic district" and a regulation requires you and everyone else in that district to maintain the exterior of your property in a certain style. As a result, the district is quaint and beautiful and everyone wants to live there. Not guaranteed to happen, but not out of the realm of possibility either.
The other issue is that government is constantly doing things which have effects on peoples' property values. A new regulation about parking might result in more people parking on your street, making it look more busy and less attractive. The same thing with a new bus route. Or a Cannabis license to a business in the downtown area of your town. Or a prison being built a mile away. Or an airport 20 miles away changing its take-off and landing patterns.
As a practical matter, it would be impossible to adjudicate all these little issues. There just aren't enough judges, courts, or lawyers. So the only realistic choice is to limit the concept of a regulatory taking to the most extreme cases.
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This theory of ownership seems bizarre to me. If I convince the local paper to run an article saying my house is much nicer than my neighbour's, and this results in his property value going down while mine goes up, am I stealing from him?
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Again:
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Not in NYC he can't. He has to buy out the existing tenants.
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The constitution says what the SCOTUS says it says, for better or worse, and for better or worse it does not regard restrictions on how you can use your property to be taking away of your property per the 5th.
If you buy a tenement because you believe (1) that people will pay rent to live in it and (2) that due to former fact, other people will want to buy it in the future, that is entirely speculative, and the government is under no obligation to compensate you if general laws make either or both of these untrue.
If the government disallows you to use your munitions factory to supply Saudi Arabia, you are not entitled to compensation due to the 5th. If the government decides that they do not want any brothels within the city limit, they do not have to pay you the difference to what you could have made if sex work had been kept legal.
If the government decides to institute 100% land value taxes so rational actors will be indifferent towards owning land (which I find personally a much nicer idea than rent controls), and property prices crash as a result, that is a business risk.
I think that there are some goods where capitalism is working very well (e.g. things with supply elasticity, e.g. shovels), and goods where markets do not work very well (e.g. things without supply elasticity, like land). People who are investing in the former are capitalists, and we might tax them but should keep in mind that they have an important ecological niche in society. People who are investing in the later are rent-seekers, and we do not need to be very careful not to step on their toes.
If you invest a million dollars into the production of shovels, that is honest capitalism. Nothing is preventing the next 99 guys with a spare million to also invest in shovels, and over time this will result in an effective supply with shovels.
Of course, it is hard to make money under honest capitalism. Perhaps you have a hunch that there will be a gold rush and shovels will be in high demand and you make a killing for a time, but if shovel production is very profitable, that means that more people will enter the market until that is no longer true.
This is why being a rentier is so much more comfortable. If you buy the best plot of land for one million, then the next 99 guys can not do the same, because nobody is producing new land in the middle of the city. This puts you in a very comfortable position.
On the other hand, while I would argue with a pitchfork-wielding mob that the shovel producer is actually important for the long-term health of the economy, I find it much harder to make a similar argument for the land-owner. There is no elasticity of supply for unimproved land. Where we might suffer a shovel to cost 100$ in the middle of a gold rush because it will result in the creation of more shovels, there is no benefit for society in the unimproved land being worth anything. If anything, it would better serve society if the gains from the fact that land is in limited supply were socialized. It might not directly lower rents too much though, rents need to be at a level where the supply and demand curve meet, after all.
Sure, the rentiers would find such an arrangement unfair, but to me that sounds like someone who bought stolen credit card numbers whining that they were revoked before he could recoup his investment.
Framing deliberate government action as a "business risk" is ridiculous. If a mobster shows up at your door expressing his sincere concern about the flammability of your property, you wouldn't call your protection money payment a "business risk," that would be absurd! If the government decides to deliberately reduce your ability to commercially exploit your property, destroying the value of your investment, calling this a "business risk" is insane. The 5th amendment requires the government to compensate you if public policy requires the use of your property. I don't see where the 5th amendment says "unless it's a business risk."
Let me give you an alternate example. Massachusetts mostly prohibits grocery stores from hard liquor. As a result, a substantial fraction of shopping plazas that have a grocery store also have a liquor store.
It is a deliberate government action to repeal those prohibitions and allow the grocery stores to sell liquor. It is also a business risk to those liquor stores as they would likely lose significant business to the larger grocery store that can offer better prices (due to amortizing fixed costs over a larger sales base).
It is, however, insane, to think that MA cannot repeal those laws without running afoul of the 5A.
So where does this land? I think a mobster or government specifically targeting individual properties for regulation is likely illegal (as under Penn) but that the uniform application of general laws is fine.
This is why so many small towns will have laws on the books along the lines of 'x establishment cannot be located less than y distance from z place', and you look at the history and the town's fleabag bar was across the street from a church in the 70's.
Yeah, but it's also why not every deliberate legislative action that materially impacts a business, even if it causes real harm, can be a taking. That would imply that once those laws are passed, they can never be repealed.
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First off, a mobster showing up at your doorstep is totally a business risk. So are commies taking over and nationalizing your enterprise, or an asteroid wiping out your business.
Taxing the heck out of your earnings, rent controls or prohibiting from running a brothel are all unlikely to fall under the 5th, as far as I am aware.
If you do not like that, I would recommend finding a nation with stronger property rights to buy real estate in.
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The court in Penn Central basically asked about investment backed expectations. The basic idea is if you bought property knowing the regulation is likely presumably the purchase price reflected that ambiguity so providing compensation is giving a windfall to the regulated entity.
Now whether this is reasonable is a different matter but that’s the theory.
By that reasoning people should have been able to sue the government on fifth amendment grounds before the regulation was passed on the grounds that even making the regulation likely reduced the value of their property. Otherwise this becomes a sleight of hand where it doesn't count before because the regulation doesn't exist yet and it doesn't count after because it happened before, leading to lack of remedy.
Government decisions affecting the value of your asset is literally a Tuesday. When the prohibition was enacted, I do not think that the breweries were compensated for lost earnings. When Trump's Iranian adventure changes the price of oil futures (which is once a day or so), the USG is under no obligation compensate the people who bet on a different outcome.
The government can make decisions which will affect the prices of real estate property has been true for as long as there have been governments. All of these risks are priced in. If the people of some city would vote for getting rid of cops, or cars, or public transportation, or laws against arson, that would very likely affect property prices. So would, to a lesser degree, a myriad other municipal decisions.
At the end of the day, citizens get to vote, properties don't. This is well known to any property owner. If you do not like that, invest in some other country.
By this reasoning, the government affecting the value of your asset can't ever be considered a taking even under the most extreme circumstances, because since it's always possible for the government to do that, it would always be priced in in advance.
For that matter, the same could be said of a conventional physical taking. If the government is known to take things, the chance that the government takes it would be priced in in its sale price, and the government doesn't have to compensate you for the physical taking either since you already (on the average) received the compensation through buying it at a lower price that takes into account the chance of government greed.
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Yeah there is an original mover problem to SCOTUS’ logic.
It's not an original mover problem to SCOTUS logic, it's a baseline definition problem in the 5A. Defining a "taking" requires comparing against some counterfactual to compare against.
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That’s not entirely true. There can be regulatory takings where your use of the property is wholly frustrated. See Lucas v South Carolina Coastal Commission
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SCOTUS does not want to go down the path of acknowledging regulatory takings.
SCOTUS has acknowledged regulatory takings on numerous occasions. It's fairly common in the land use permitting context under the so-called unconstitutional conditions doctrine (Nollan/Dolan, Koontz, Sheetz). Then there's Palazzolo, Cedar Point (technically a per se physical taking under Loretto, but invalidating government-imposed private trespass as a taking even though nothing was actually seized and the total loss in value was negligible), etc. And of course Lucas and the granddaddy of them all Pennsylvania Coal.
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They did somewhat in Lucas v South Carolina Coastal Commission
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It seems to me that rent control is not as extreme because the landlord still gets to collect rent on his property and can apply to some pink board somewhere for rent increases. Of course I agree that rent control (and other price controls) are, generally speaking, bad public policy, but it's debatable whether they rise to the level of being a taking.
I think that the government is constantly interfering with property rights and that interference runs the spectrum from what is generally thought to be reasonable (e.g. you aren't allowed to build a factory in a residential neighborhood) all the way up to something that's clearly a taking (e.g. the government simply seizes your land). It's very difficult to draw the line, and that's what judges do -- exercise judgment.
Depends on what you mean by property rights. You bring up nuisance but that really involves a situation of conflicting property rights. A wants to use its property for X which conflicts with how B wants to use its property. How do you solve that? Well the law of nuisance. Or if you like law and Econ read The Problem of Social Costs by Coase.
That is fundamentally a different kind of regulation compared to rent control. In the first, there is a conflict in property rights. In the second, there is no conflict.
I'm not sure I understand your point here. If you tried to build a factory in a residential neighborhood, what would stop you is zoning laws. Are you saying that society could or should get rid of zoning laws and just stick to the concept of common law nuisance? (I agree that would let you stop a cement factory, but I'm not sure it would help if someone built a two-family house in an area which was zoned for single family houses.) Not trying to trap you, I genuinely don't understand your point.
Zoning law is kind of a shitty version of common law nuisance. You won’t find defending zoning qua zoning. But it is an out growth of common law nuisance and is getting at something inherently different than rent control (ie what do you when rights are incompatible). Thus comparing the two is a category error.
FWIW, I would get rid of zoning and permit restrictive deeds including racial.
Towns never handled conflicting land uses with common law nuisance - explicit regulation of land use inside the city walls is as old as self-governing towns. And the most problematic rural nuisance in the US (straying livestock) was regulated by explicit statutory codes which varied by state (open range vs closed range) because applying common law nuisance led to unsatisfactory results.
Common law nuisance works better than nothing as a default where there is no codified solution in place, but people replace it with governmental codified solutions (environmental regulations, zoning etc.) or privatised codified solutions (condo/co-op/HOA rules, restrictive covenants, long leases instead of freeholds) at the first opportunity.
Coase's theorem tells us that something like the common law rule allows market participants to cut deals and achieve efficient outcomes (and, in particular, may do better and will not do worse than a Pigouvian tax on the nuisance) if:
The second condition almost never holds in the context of urban land use, and both courts and legislatures can see this, so you end up either with command-and-control regulation or Pigouvian taxes. In the urban context you can model a municipally-imposed and collected Pigouvian tax as a Coaseian bargain between the polluter and the community as a whole.
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This is incoherent. There's no philosophical difference between "I am buying this land and subdividing it with a restrictive covenant that it may only have single family homes" and "I am founding a town and passing a zoning ordinance that only allows SFH".
Nah — the point is zoning is top down with one body deciding everything. Restrictive deeds would be more de centralized so you end up with a lot more actual diversity in land use while maintaining the ability to minimize conflicts.
It's not one body, it's every locality!
If your argument here is "the optimal size of a town is somewhat smaller than the current size", I can see that.
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I think you have that backwards. I'll never understand why libertarians and others persist in the belief that the civil court system is a kind of frictionless plane. Granted, if you have an actual dispute to resolve, it's indispensable and better than a lot of alternatives I've heard proposed, but if you can pass regulations to cut lawsuits off at the pass, you should. Imagine you want to build a cement plant. You have two options:
Build it and hope that nobody complains. You have nothing to go by ahead of time. If someone doesn't like what you're doing, or thinks it's too noisy, or complains about dust, you can pay your attorneys to spend several years litigating the definition of "reasonable" to a jury that is probably going to have more people sympathetic to noise and dust complaints than it does people who own industrial plants. Repeat this situation for every use that anyone could find remotely objectionable, which is any use you can think of. Be prepared to suspend your operations throughout the duration of the suit. Be prepared for the court to rule you have to shut down permanently, or pay ongoing damages in an amount that makes it economically unfeasible to continue.
Look at the municipalities ordinances for zoning and noise and dust abatement. Make sure you comply with the ordinances and obtain formal exemptions if you can't. If nearby homeowners want to litigate, they can do so before you've spent any serious money, and they won't be suing you so much as they will the municipality that granted the exemption. If the use is allowed by right and you are complying with the regulations, it's going to be a tough row to hoe for the plaintiffs.
These days, almost every private nuisance action I've seen has been based on independent studies showing that the defendants violated a municipal regulation that the governing body has failed to enforce; the arguments boil down to whether or not a standard was violated. The system you'd prefer is a system where both parties have to argue their version of what the standards should be. Maybe ya jury is convinced that 90 dB at the property line is an unreasonable amount of noise. We know nothing about whether 85 is okay or not. Actually, we know nothing about whether 90 is okay in another case because a different jury might see things differently, or maybe the guy suing is a huge asshole and they all agree that he deserves to live next to a hog rendering facility.
Which brings me to my second point, which is that zoning regulations were not an outgrowth of common law nuisance, at least not as we'd recognize nuisance today. Traditional common law nuisance laws, i.e. things actionable under an Assize of Nuisance, almost exclusively related to water runoff and land support. The idea was that nuisance was a counterpart to trespass; where in trespass I damage your land by entering onto it, in nuisance I do something on my own land that causes your land to be damaged. The distinction between the two was always fuzzy and by the 19th century they were all trespasses and nuisance was practically a dead letter. The doctrine as we know it today to apply to noises, smells, and the like was part of a 20th century revival that went hand in hand with the development of zoning regulations. Courts and municipal governments were looking for way to mitigate the negative effects of development, and these were two of the things they came up with.
This is why I'm not sure what you're talking about when you act like nuisance has something to do with "rights" while rent control doesn't. All rent control legislation—which coincidentally arose around the same time as zoning legislation and the modern conception of nuisance—does is create a right of a tenant to not be charged rents in excess of a specified maximum. It's no different than any other right a tenant has, whether derived from statute or common law. And if you think that there's something about common law rights that make them superior to statutory rights, keep in mind that the right to sell your property was created by statute.
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Thank you for clarifying that. I think the line is blurrier than you are making it out to be.
For example, it's very common for zoning laws to mandate minimum lot sizes and maximum numbers of units per lot.. Even though the developer (and eventual landlord) would prefer to have a larger number of units so as to maximize revenue, the municipality limits what he can charge, albeit in a roundabout way. The unstated purpose of these types of requirements is to keep out the riff raff, so to speak.
To be sure, you could argue that the neighbors of this developer have a property interest in limiting the intensity of use of neighboring lots, you could just as easily say that rent-control tenants have a property interest in being able to stay in their apartments while paying a reasonable rent.
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And just what is a 'pink board' when it's at home?
Most of the search results were about insulation.
In my day, the word "pink" was slang for "somewhat communist." It meant someone who had communist leanings but who wasn't a full on Soviet.
So a board unlikely to be sympathetic to arguments of the form "$LANDLORD1 and $POTENTIAL-TENANT2 are richer than $CURRENT-TENANT3, therefore $LANDLORD1's desire for a fancy car to compensate for his anatomical shortcomings and $POTENTIAL-TENANT2's desire to move into the district that two decades ago he treated as more dangerous than Fallujah are more important than $CURRENT-TENANT3's desire to stay in the home where she has lived through the entire Elizabethan era while still being able to afford to taste something other than shame."
Agreed. A more interesting question is whether that board would be sympathetic to the landlord's argument where (1) the current tenant has been retired for many years; his children have moved out; and not only does he have a lot more space than he needs, he has a location which is much nearer to the financial district than he needs; (2) the potential tenant could make much better use of the apartment since he has a wife, small children, and a job nearby; and (3) the landlord is a real estate investment trust with many investors who are themselves retirees who are struggling to make ends meet.
That being said, I think your hypothetical exposes a basic question of economics: Should scarce and valuable resources be distributed (1) based on a committee's opinion about who is most deserving; or (2) based on peoples' willingness to pay some private owner for those resources. I think it's fair to identify the first approach with Communism and the second approach with Capitalism.
You can certainly argue things both ways (and it doesn't have to be all one or the other) but my observations of history strongly suggest to me that option (1) tends to be counterproductive -- to put it politely.
I think it's also worth keeping in mind that other than the landlord, the first potential tenant, and the second potential tenant, there is another party to your hypothetical: Another potential landlord. Because as a society we want and need capital to be invested in building new housing stock. If the rent control mechanism sides too strongly with incumbent tenants, it will chase away investors and ultimately harm the class of people which the system is, in theory, trying to help.
One last point:
This is a big part of my issue with Communism or Marxism or whatever you want to call it. In practice it is typically infused with a kind of mean-spiritedness to the point where it can be seen as a kind of hate ideology. If the goal is to punish and humiliate rich people, well, even if a case could can be made for Communism in the abstract, it's probably not worth pursuing.
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A board that treats competence and contributing to society in ways that people actually desire enough to pay for, pale skin, and indeed the ability to spell your own name as being spiritual defects and anatomical defects per your charming descriptor, decided that being able to use the fruits of your labour to improve your life and to make a new prosperous district mattered far less than the right to contribute nothing while defecting on your debts and shoving the costs onto other people.
Isn't bulverism fun?
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I assume it's a derogatory use of "pink" to mean "left-wing" (an older meaning of the word, but it checks out).
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This line of thinking is dangerous. Eventually you will start questioning ADA and Civil Rights Act
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I quite like the first right of refusal part of this law, and find the second right of refusal for non-profits to be a pretty obvious opportunity for abuse which has been rightly litigated.
I also think such a right of refusal should side-step the foreclosure rules. The problem is that the debts on the property are discharged in foreclosure, whether they're paid off or not. If I'm a tenant who wants to purchase the building that the owner defaulted on, either I should pay enough to discharge those debts, or I need to take them on myself. The whole reason foreclosure exists is for a mortgaged property that nobody is willing to buy normally - if there is a buyer, but at a discounted price, then foreclosure shouldn't even apply. Or am I missing something?
Isn't even this ripe for abuse? You have a big mortgage; you get foreclosed on; and your spouse or kid buys it at a steep discount. Or am I misunderstanding how it works?
If the price they pay for it is enough to discharge the mortgage debt, then they should be free to do so. If not then yes it's potentially abusable.
But according to op the first right of refusal has never been exercised. I think that's because if your spouse or kid can afford to buy your house at a discount, it's likely much better for them to help you avoid foreclosure in the first place.
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I had written up a response about how buying a foreclosed property requires way more cash up front than a normal mortgage and that seems like a rare situation where a parent is really hard up while a kid has a decent amount of money laying around, but AI tells me NJ specifically wrote this law to give a 90 day window to find a normal mortgage.
They are trying to prevent misused directly with:
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Interesting. I have no opinion on constitutionality, but it occurs to me that if this were legal, the main consequences would be that mortgages would be harder and more expensive to get. Which would be... Not entirely a bad thing? Easy mortgage availability subsidizes demand, perhaps beyond the economically optimal equilibrium level given the irrationality of people around home purchases. (I now feel qualified to speak on that given I am irrationally buying my first home currently.)
This only really affects second mortgages - a foreclosing first mortgage holder will normally set the upset price equal to the outstanding balance plus fees. If nobody bids enough at the auction to make the lender whole, then they will take back the property and sell it the usual way as REO* (which normally gets a better price than an auction because you can sell to normie buyers). In fact, this is what almost always happens, because properties with enough equity to cover the fees and expenses of a foreclosure don't normally end up in foreclosure.
The situation is different when there is a second mortgage and the property is valuable enough that a sale will pay the first but not the second. In this situation the second mortgage holder may bid above the upset price, win the auction, and sell the REO themselves. (They are able to do this because they are in effect paying themselves - anything the first mortgage holder collects at auction above the upset price goes to the second mortgage holder anyway). But if someone exercises a "Jersey first refusal" to buy the property at the upset price set by the first mortgage holder, the second mortgage holder gets wiped out.
That would be easy first mortgage availability. Using a second mortgage on a purchase was one of the shady practices that were mostly banned after the 2008 crisis. Most second mortgages are used when the homeowner wants to cash in equity (for any of multiple good or bad reasons) without refinancing the first mortgage (either because they have a fixed rate which is now below market, or because their credit has deteriorated so they couldn't get a prime refi - this second case is the classic use case for subprime).
My guess is that this is intended as a straightforward taking from subprime second mortgage lenders to benefit sympathetic-to-Democrats financially irresponsible homeowners.
* Real Estate Owned
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If I understand the law correctly, the effect would be that second mortgages become difficult or impossible to get. The holder of the first mortgage would be fine, because if there is a foreclosure, all it needs to do is set an upset price a little higher than the outstanding debt on the mortgage plus costs.
I guess what would happen is that people who needed a loan secured by a second mortgage would go to whatever bank holds the first mortgage.
Maybe. For what it worth, when I started a business a number of years ago I financed it with a HELOC secured by a second mortgage. It was extremely useful to have a line of credit to get me through the ups and downs.
That being said, I'm sure a lot of people would be better off if they were unable to get HELOCs or other loans secured by second mortgages.
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Or as has become the popular term, a home ownership desert forms.
Someone has to own the underlying land, and the government can just tax that land to provision services to the residents. The government is the ultimate landlord, and therefore inevitably capable of abrogating most economic rents to itself.
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If it were legal, people would find some clever solution to default and reap the rewards, like they used to do for student loans. You are correct that mortgages would have to price in the cost, which would be distributed by law to the parties that don’t have the problem in the first place. Eventually, banks may stop serving the state, as we see in the insurance market.
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