Promising to Be Prudent: A Private Law Approach to Mortgage Loan Regulation in Common-Interest Communities

Abstract

This Article explores one possible private law prescription that may help common-interest communities avoid the financial disaster associated with foreclosure epidemics-a financing restriction that would limit (1) the ability of any homeowner in a common-interest community to borrow excessively against the value of her home, and (2) the ability of lenders to make loans that a homeowner does not have the ability to repay. Part I of this Article begins in the Great Depression with a discussion of Neponsit Property Owners' Association v. Emigrant Industrial Savings Bank, w exploring how the case both fostered the development of common-interest communities and foreshadowed the current crisis in which common-interest communities find themselves. Part I also discusses reasons why commoninterest communities may have evolved without the inclusion of a financing restriction. Part II explains the failure of the regulatory system to prevent the mortgage crisis and outlines recent regulatory changes. Part II also discusses the advantages of this private law approach in protecting commoninterest communities. Part III analyzes the legal enforceability of a financing restriction, while Part IV outlines some of the practical challenges to implementing financing restrictions in the marketplace. Part V sets forth a proposed financing restriction for integration into the documents for common-interest communities.

Keywords: Common-interest community, Restrictive covenant, CCRs, CC&R, Predatory lending, Subprime lending, Home mortgage, Home mortgage loan, Home equity loan, Real estate finance, Real property law, Secondary mortgage market, Consumer law, Consumer protection, HOEPA, Home Ownership and Equity Protection Act