Real estate practice in the twenty-first century.

• Author: Burkhart, Ann M.
• Position: Symposium: A Festschrift in Honor of Dale A. Whitman

1. INTRODUCTION

   The next century will bring profound changes in real estate law and in the ways that it is practiced. This prediction may seem rather unremarkable for any area of law or for almost any other area of human endeavor. But the changes in real estate law will be exceptional because of their relative rapidity and comprehensiveness.

   Real estate law, perhaps more than any other area, has changed very slowly since the beginning of the common law legal system. The mortgage, which will be the engine for this century's developments, is a particularly striking example of this slow rate of evolution. (1) The instrument itself was called a mort gage as early as 1189 in England, (2) and today's substantive mortgage law is descended directly from England's Middle Ages.

   Unlike the laws concerning security interests in personal property, which the Uniform Commercial Code codified and modernized, mortgage law never has been thoroughly overhauled. (3) Modern mortgage law essentially is a mound of bandages; as a problem emerged in the law's structure, a court or legislature would attempt to graft a solution onto the existing law. Almost inevitably, that solution created another problem, and the mound of bandages continues to grow. This rather haphazard method of development has made modern mortgage law and practice unnecessarily complex and cumbersome.

   Given the great importance of land finance to our economy and to our society more generally, (4) this state of affairs may seem surprising. Part of the explanation is the enormous conservatism of real estate law. Because land usually is permanent and valuable, land law is designed to provide stability of titles. (5) Land titles must remain comprehensible from generation to generation so that they are question-free. Moreover, when dealing with an asset as valuable as land, lawyers generally are more comfortable using time-tested methods, rather than experimenting with new techniques. As it is, real estate law practitioners are subject to more malpractice claims than virtually any other practice area. (6)

   The other, less benign, explanation for the relative absence of change is the self-interest of real estate lawyers, title insurers, and other participants in the real estate market. The more arcane the law remains, with its many traps for the unwary, the more indispensable are the services that these market participants provide. Additionally, changes in law and practice can require them to make substantial personal investments in education and technology. (7) As a result, title doctrines and estates in land that originated in the earliest centuries of our legal system still exist.

   The traditional resistance to change is illustrated by the very unsuccessful efforts of the National Conference of Commissioners on Uniform State Laws (NCCUSL) to introduce uniformity into real estate law. NCCUSL has proposed a wide variety of uniform and model land laws since the nineteenth century. Most have not been enacted by even one state. (8) The American Law Institute's ten-year-old Restatement (Third) of Property: Mortgages has been more successful, but the changes it has caused have been only incremental because adoption depends on individual judicial decisions, rather than on legislation. (9)

   Despite this traditional inertia, the weight of centuries of land law is now yielding to the irresistible force of the market--in this case, the market for mortgages. Since antiquity, mortgages have been an attractive form of security for lenders. (10) Default rates normally are quite low, (11) and, in the event of default, the mortgaged land usually is worth enough to repay the loan. Today, these features of mortgages have made them as attractive to the financial markets as to lenders. Investors in this country and around the world have developed a voracious appetite for American mortgages. (12) Particularly in countries with unstable political systems and financial markets, American land and mortgages are regarded as relatively secure investments. (13)

   The global sale of American mortgages constitutes a dramatic break from the past. Until relatively recently, prospective homeowners borrowed from a lender located within fifty miles of their land, and the lender held the note and mortgage for the entire loan term. (14) Today, lenders normally sell most of the residential loans they make to what is known as the secondary mortgage market. To raise capital for these purchases, the secondary market purchasers sell ownership shares in the pools of mortgages they acquire or sell bonds that are secured by the mortgages ("mortgage securitization"). (15) International sales of residential mortgage-backed securities (RMBS) benefit borrowers by lowering interest rates on mortgage loans and by increasing the availability of mortgage capital. (16)

   The momentum of the RMBS market is demonstrated by the rapidity and magnitude of its growth. Although it was relatively small until the 1970s, (17) the value of outstanding RMBS in 2006 was approximately $6 trillion, which constituted 22.9% of the U.S. bond market. In contrast, corporate bonds constituted 20.4% of the market, and Treasury bonds constituted 16.3%. The daily trading volume of RMBS in 2006 was more than $263 billion per day. During that time, the daily trading volume of corporate bonds with maturities of more than a year was only $23 billion. (18)

   The success of the RMBS market created the impetus for securitization of mortgages on commercial property, such as shopping malls and office buildings. The size and rate of growth of the market for commercial mortgage-backed securities (CMBS) is as dramatic as for the residential mortgage securities market. In 2000, $48.7 billion in new CMBS were issued. Only six years later, $205.7 billion in new CMBS were issued, (19) and the total amount of outstanding CMBS reached $769.6 billion. (20)

   The phenomenal success of the secondary mortgage market is driving many of the changes that are occurring in real estate finance law and practice. Perhaps the most dramatic change is the increasing standardization of mortgage law, as discussed in Part II of this Article. The growth of secondary markets in other countries is a significant reason for the rapidly expanding transnational practices of many American real estate lawyers (Part III). The increasingly national and international scope of real estate practice and the standardization that it generates are beginning to cause a loosening of the ethical restrictions on multijurisdictional practice and on laypersons providing real estate settlement services (Part IV). Finally, the demands of the mortgage market for greater efficiencies are changing real estate transactions from paper-based to electronic (Part V).

2. STANDARDIZATION OF AMERICAN MORTGAGE LAW

   Since the founding of this country, real estate law has been almost exclusively the province of the states. After the Revolution, the English Crown's title to the colonies' lands passed to the new states. In forming a national government, a substantial concern for the new states was the potential loss of sovereignty over the land within their borders. To quell that fear, each original state retained title to the land within its borders, subject only to titles held by private persons. The original states also retained political sovereignty over their lands. (21)

   As each new state was admitted to the Union, the federal government granted it title to and sovereignty over the land within the state pursuant to the "equal footing" doctrine--the doctrine that each state would enter the Union on an equal footing with the original states. (22) As a result, land laws in this country vary widely by state due to several factors, such as differences in geography, history, and political development. Like other aspects of land law, mortgage laws differ greatly among the states as each has worked to strike a balance between the rights of lenders and borrowers. No two states have the same mortgage laws. (23)

   These differences in state laws had little impact on the mortgage market when it was largely a local enterprise. Today, however, the lack of uniformity has proven to be a significant problem for the secondary market because a mortgage's value is affected by the laws of the state where the mortgaged land is located. (24) This effect is so significant that prospectuses for offerings of mortgage securities usually describe the state laws that govern the mortgages in the pool, particularly the foreclosure laws. (25)

   1. Federal Preemption

      During the past 35 years, the federal government has attempted to create greater uniformity in mortgage law. To date, its efforts have focused on exempting federal entities from state mortgage laws. For example, in 1973, Congress considered legislation that would have exempted all federal entities from state foreclosure laws. (26) Although that legislation failed, Congress has considered similar legislation several more times. (27) Unable to enact such a broad exemption, Congress enacted legislation in 1981 and in 1984 that exempts the Department of Housing and Urban Development from state foreclosure laws. (28) A currently pending bill would extend this exemption to state and local governments to which HUD transferred a multifamily mortgage. (29)

      The scope of the HUD exemption demonstrates Congress' aggressiveness in displacing state laws. "[T]hese federal nonjudicial foreclosure laws combine the harshest features of foreclosure processes currently in existence under state laws and together provide the least protection to defaulting borrowers in comparison with the laws in each of the fifty states." (30) These federal laws eliminate the most important state borrower protections, including the statutory right of redemption (31) and anti-deficiency laws. (32) They authorize HUD to foreclose without judicial proceedings ("nonjudicial foreclosure"), even in the approximately 20 states that do...