In recent months, Congress has debated ways to minimize the risk of losses from federally insured depository institutions, from insured lending programs run by the Federal Housing Administration and the Veterans Administration, and from lenders such as Fannie Mae and Freddie Mac.
One relatively simple reform Congress should consider would be national mortgage foreclosure laws for all federally related mortgage loans.
In recent years, the federal government has become the primary underwriter - directly or indirectly - of most mortgage credit in the United States.
A Clear-Cut Link
The federal link to commercial real estate lending is becomming increasingly clear as the Federal Deposit Insurnce Corp. assumes the burdens of depository institutions rendered insolvent by commercial mortgage loan losses. The FDIC is inheriting those mortgages, and must enforce them or foreclose.
The federal subsidy to residential mortgage credit is even more clear-cut. The primary sources of nearly all conventional residential mortgage credit in the United States today are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Because of the implied or real federal backing for their securities, Fannie Mae and Freddie Mac are able to generate and provide mortgage credit at a rate with which private credit sources cannot compete.
Banking regulators have recognized the enhanced credit worthiness of the mortgage-backed securities issued by these agencies by allowing depository institutions to reserve less capital for this type of investment than for an investment in a whole mortgage loan.
Red Ink for FHA Program
The federal subsidy for FHA- or VA-insured mortgages is direct and explicit. In recent years, the FHA insurance program has generated red ink.
While the federal government is directly or indirectly underwriting most mortgage credit in the United States today, enforcement of that credit remains subject to the kaleidoscopic laws and regulations of our 50 different states, plus the District of Columbia and the U.S. territories.
Those state laws vary from extreme efficiency (from the creditor's point of view) to intolerable delay or inefficiency. Texas and Georgia provide for foreclosures to be completed in 30 days, with no contest. By contrast, in a number of states, a borrower has up to one year after foreclosure to redeem his or her property by repaying the debt.
In addition, the 50 states have two different types of mortgage foreclosure systems - judicial and nonjudicial.
Jurisdiction of States
This complexity is grounded in the legal history of our country, which traditionally has left real property laws, including foreclosure, to the states.
What has changed in recent decades has been the fast-growing centralization of mortgage credit to the point we have reached today: the U.S. government as primary underwriter for residential mortgage credit in all 50 states and an indirect underwriter of commercial mortgage credit through deposit insurance for the banking system.
Given these facts, it is logical to suggest that the federal government be protected by a uniform remedy for federally related mortgage credit in the form of national foreclosure laws.
Precedents Noted
There are a number of precedents for such a proposal. In 1981, Congress enacted a federal mortgage foreclosure laws for multifamily mortgage loans owned by the Department of Housing and Urban Development.
The type of mortgage loan to which this law applies is quite rare. But for these loans that do come within its ambit or scope, the provisions of the law supersede the diverse laws of the 50 states.
This federal foreclosure law provides for a nonjudicial sale of the mortgage property. Because it involves nonconsumer credit, the time frame is quite short: about a month from commencement to completion.
In 1982, Congress again became involved in regulating mortgage credit enforcement when it legislated away the "due on sale" controversy as part of the Garn-St Germain Law.
At the time, a number of state courts had created havoc in the enforcement of mortgage call provisions, called "due-on-sale" clauses, by ruling that such provisions were unenforceable. It took an act of Congress to resolve the controversy and permit uniform enforceability by any "federally related mortgage lender." The law's definition of such lenders was extremely broad.
Similar Congressional intervention occurred in the late 1970s to override state usury laws that were impending the free flow of mortgage credit.
Economies Available
A uniform federal foreclosure law would create a number of beneficial economies not only for the banking and lending industries, but for the federal government as well. As banking becomes increasingly multistate, it would allow mortgage credit decisions to be made by federally insured depository institutions based on a uniform recovery system.
For Fannie Mae, Freddie Mac, and HUD, it would allow 50 or more separate types of mortgage lending forms to be consolidated into a single format effective nationwide.
Perhaps most important for the public interest, if the federal government must step in for insolvent financial institutions, a uniform foreclosure law would minimize losses caused by the current patchwork quilt of 50 different remedies.
Mr. Sanders, general counsel for Chase Federal Bank in Miami, is cochairman of the mortgage law committee of the Florida Bar Association.
