The Rising Tide June 18, 2008

Whether you believe in global warming or not, there is ample evidence that ocean levels are rising, which has created some very interesting legal issues, namely what happens when a public beach moves onto private property? This is precisely the issue in Surfside, Texas – a small beach town south of Houston. To read an article about the struggle of one homeowner dealing with this issue in Surfside, Texas, NPR has written an interesting article on it.

At issue in Surfside is private property rights and the provisions of the Texas Open Beaches Act, a 50 year old act, which was passed in order to protect the public’s right for “free and unrestricted” access to state-owned beaches. Enforcement of the Act has effectively resulted in the state and the lowers courts ruling that once land is on a public beach — through erosion or another factor — any private structure has to be moved.

Enforcement of the Act has resulted in lawsuits over the state’s ability to enforce the Texas Open Beaches Act. For example, Wayne and Janice Mikeska and Mose and Carol Smith filed a lawsuit against the City of Galveston for its refusal to grant permits for reconnection of their homes to utility services after Tropical Storm Frances.

Until 1998, when Tropical Storm Frances hit the coast of Texas causing erosion of the vegetation line, their homes were landward of the public beach. After Frances, their homes were entirely seaward of the vegetation line- i.e., the homes were completely situated on the public beach as defined by Texas law. Along with 105 other houses that were also fully positioned on the public beach, their properties were placed on the Texas General Land Office 100% List. The 100% List consisted of 107 homes on the Texas coast that, after Frances, were 100% seaward of the natural vegetation line and therefore considered encroachments on the public beach. The 100% List was submitted to the Texas Attorney General to decide whether the listed homes should be removed.

The City of Galveston then condemned their homes, disabling a number of important utilities including electricity, sewer, and water services. Although the Attorney General concluded that their homes did not require removal, the Attorney General’s office notified the homeowners by letter that it was deferring any questions as to the reconnection of utilities services to the City. The owners submitted a number of requests for the reconnection of their electricity, water, and sewer lines. As to the sewer lines, the homeowners requested connection to the City’s newly constructed line. Their requests, along with those from five others were rejected.

The homeowners subsequently filed suit in federal court seeking both a preliminary injunction to force the City to allow the restoration of utility services and compensatory damages. The district court granted the preliminary injunction request, and the appellants pursued their suit for money damages, averring that the City violated their substantive due process and equal protection rights under the color of state law.

On the City’s motion for summary judgment, the district court dismissed the owners’ complaint. According to the district court, the City’s actions were rationally related to the protection of open access to the public beach (substantive due process) and to the City’s obligation to follow state law to “protect the public beaches from interference” (equal protection). The homeowners filed an appeal in the Fifth Circuit Court of Appeals.

The owners argued to the appeals court that neither the City’s persistent denial of the appellants’ requests for utility connections nor its differential treatment of appellants’ homes vis-a-vis similarly situated houses was rationally related to any legitimate governmental interest.

The appeals court ruled that the City must conform its discretionary actions to its constitutional obligations; because the City did not demonstrate the requisite rational relationship to sustain a motion for summary judgment at this stage of litigation, the court vacated the district court’s determination as to the substantive due process claim.

The homeowners’ equal protection claim was based on their contention that there are a number of other similarly situated homes that were allowed reconnection of their utility services. In contrast to a due process action, which looks solely to the government’s exercise of its power vis-a-vis the appellants, an equal protection claim asks whether a justification exists for the differential exercise of that power. To bring such an equal protection claim for the denial of zoning permits, they had to show that the difference in treatment with others similarly situated was irrational. The appeals court ruled that city’s actions indeed were irrational.

This case, along with the ongoing “just compensation” issues raised by the Porters in the NPR article, perhaps foreshadow the various legal issues that may well occur as coast lines continue to encroach on private property.

Not Your Typical Foreclosure…. June 12, 2008

Clearly, the foreclosure crisis is real and is affecting a broad spectrum of people. In other words, the epidemic is not just hitting homeowners with subprime mortgages with adjusting rates. Indeed, it seems those at the upper echelons are being hit as well. Indeed, Ed McMahon‘s six-bedroom, five-bathroom, 7,000-square-foot house is on the verge of foreclosure.

While predatory lending certainly is component in the foreclosure epidemic, the example of Ed McMahon exemplifies the current problem – living beyond your means. Ed McMahon stated “If you spend more money than you make, you know what happens. . . ” Indeed, this seems to be what is happening to many people in general. When lending was loose, people were qualifying for homes they likely had no business purchasing in the first place. Once the go-go days of the real estate boom ended, equity dried up and many are now upside down in their houses. It seems that no one expected for prices to turn so quickly and drop so hard.

I am not sure there is a silver lining in all of this, but I think with a foundering economy, high gas prices, and the steep downturn in the housing market, people are beginning to reassess their lifestyles, and perhaps question whether the immediate gratification mindset is sustainable any longer.

Stucco vs Equines June 12, 2008

A recent article in the Arizona Daily Star – http://www.azstarnet.com/altds/pastframe/metro/242778 – discussed and highlighted an increasingly controversial land use issue: what happens when the suburbs run into rural land uses, namely small horse ranches. Interestingly, I represent one of the landowners in the article that is facing the opposite situation – what happens when a horse owner alters a property for horse uses in a residentially zoned property? The issues my clients are facing are slightly different that the encroachment cases, which have an interesting legal history in Arizona, and are discussed below.

Seeking a place to ride their horses and enjoy the relative quiet of a more rural existence, historically, horse owners located well outside Tucson’s city limits. However, the increasing pressures of suburban sprawl have resulted in some contentious disputes between the once rural dwellers and their new suburban neighbors.

Obviously, many horse owners never had to concern themselves with their neighbors either because their neighbors were located some distance away or shared a similar lifestyle. Now, the encroaching neighbors are none too excited at the prospect of horse corrals and the potential for manure and flies.

A classic Arizona land use case, Spur Industries, Inc. v. Del E. Webb Development Co, 108 Ariz. 178 (1972), dealt with the issue of what happens when suburban development runs into a prior existing use. In Spur, an action was brought by Del Webb to enjoin Spur Industries’ cattle feeding operation. Spur Industries’ predecessor began operating the cattle ranch about 15 miles outside of Phoenix in 1956. In 1959, Del Webb began the construction of the community now known as Sun City. While Del Webb was not initially concerned about the odors from the cattle operation, Del Webb later had trouble selling lots near the southern edge of the feed lot.

Del Webb’s filed a lawsuit against Spur Industries, complaining that the feeding operation was a public nuisance because of the flies and the odor which were drifting or being blown by the prevailing south to north wind over the southern portion of Sun City. Del Webb’s suit to enjoin the alleged nuisance was an equity claim, which allows the courts to use their broad powers to reach an fair and reasonable solution. Indeed, the courts have long recognized a special responsibility to the public when acting as a court of equity:

This case dealt with what is known as “coming to the nuisance.” The courts have held that the residential landowner may not have relief if he knowingly came into a neighborhood reserved for industrial or agricultural endeavors and has been damaged thereby. In other words, a party cannot justly call upon the law to make that place suitable for his residence which was not so when he selected it.

The court described the case as an example where a business established at a place remote from population is gradually surrounded and becomes part of a populous center, so that a business which formerly was not an interference with the rights of others has become so by the encroachment of the population.

The court found that Spur Industries was required to move, not because of any wrongdoing on the part of Spur Industries, but because of a proper and legitimate regard of the courts for the rights and interests of the public.

However, the court went on to say that Del Webb is not blameless in the matter, because it brought people to the nuisance to the foreseeable detriment of Spur Industries, and Del Webb must indemnify Spur Industries for a reasonable amount of the cost of moving or shutting down.

The issues addressed in Spur are alive and well in the context of the Arizona Daily Star article. How the courts choose to deal with the inevitable clash between competing land uses remains to be seen. However, it is clear that these issues will remain contentious going forward.

Foreclosure Woes June 12, 2008

I will be focusing many of my future posts on the foreclosure crisis. Here is a good article talking about the record number of foreclosures in the United States.

NEW YORK (CNNMoney.com) — More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb.

The Mortgage Bankers Association’s first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That’s up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.

The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That’s up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007.

The seasonally-adjusted rate of homeowners behind on their mortgage payments also hit a record high. Nearly 3 million home loans, or 6.4%, have missed at least one payment, while about 737,000 are at least three months past due, but not yet in foreclosure.

Grim numbers

“The figures aren’t surprising, but they’re pretty ugly nonetheless,” said Michael Larson, real estate analyst with Weiss Research. “We’re talking higher delinquencies and foreclosures pretty much across the board.”

And he doubts that there’s much reason to expect the foreclosure crisis to abate until next year at the earliest, adding that it could be a couple of years or more before foreclosure rates retreat to more normal historical averages.

“It’s the same story we’ve been seeing for a while now – we had too much reckless lending, and buyers who got over-extended,” he said. “We’ve had an unprecedented decline in home prices on a nationwide basis, which is public enemy number one for mortgage loans. And now you’ve got an overall economy that has slowed adding to this toxic stew.”

Good credit, bad credit

Much of the problem lies with subprime loans given to borrowers with weaker credit records, especially those loans that had adjustable rates. Nearly four out of ten subprime ARM loans are a month or more late, or in foreclosure. And subprime ARMs account for 39% of the loans that fell into foreclosure during the quarter.

Prime fixed-rate loans, which are considered very low risk, have also seen sharp increases in their delinquency and foreclosure rates, although they are performing far better than the riskier loans on the market.

There are 431,000 prime loans in foreclosure, a seasonally adjusted rate of 1.2% that is more than double the 0.5% rate a year ago.

The report showed about 1.2 million prime mortgages are now a month or more past due, a seasonably adjusted rate of 3.7% of those loans. That’s up from a rate of 2.6% a year ago.

According to Jay Brinkman, MBA’s vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn’t require income verification for buyers with good credit. Prime loans are also getting into trouble in places such as Florida and California, which have seen sharp home price declines.

“You still have people with prime fixed rate loans who lose their jobs, who get a divorce or have an illness come up, and can no longer afford a house,” Brinkman said. “In areas where there’s been home price appreciation, you can get out of that with the sale of a home or some other negotiation.”

Getting worse before it gets better

This marks the sixth straight quarter in which a record percentage of loans went into foreclosure.

The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans.

Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns.

California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have nearly 400,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.6% of all of the loans in these states are now in foreclosure.

“Clearly things in California and Florida are going to get worse before they get better,” said Brinkman.

The other two states that are ground zero for the crisis – Michigan and Ohio – have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector.

Ohio has about 61,000 homes in foreclosure, while Michigan has about 54,000. The foreclosure rate in those two states is 3.9%.

There is a glimmer of good news. The rate of homes going into foreclosure in Ohio and Michigan was narrowly lower than it was in the fourth quarter, and 18 other states also saw a decline in that rate.

Brinkman said he hoped that means the crisis is at or near a bottom in much of the country, and that foreclosure prevention efforts have started to have an effect. But he added that a slight improvement in one quarter doesn’t necessarily mean the end is near.

Indeed, the rate of homes going into foreclosure continued to climb sharply higher in California and Florida, as has the rate of loans in those states that are 90 days or more past due but not yet in foreclosure. Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.

He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.