Legal News

UCLA Dean on Mortgage Crisis: Too Few Lawyers in Home-buying

By Dan Slater

Typically, the only way the mortgage crisis and housing issues make their way onto the LB is when we’re talking about Subprime Legal. We like to leave the rest to our colleagues over at the Developments blog.

But when we found out that the dean of UCLA law, Michael Schill, is a property and real estate expert we thought he might be able to offer a lawyer’s perspective on the housing crisis. After all, Schill, 49 (Princeton, Yale Law), now has his name on the famous Dukeminier property casebook. In 1984, before going into teaching, he wrote a book about gentrification called “Revitalizing America’s Cities: Neighborhood Reinvestment and Displacement.”

Hi Dean, thanks for taking the time to chat. There was some news yesterday about Ninth Circuit Judge Alex Kozinski. He’s an alum of UCLA law.

Yes, he did go to the law school. He’s an extremely bright and influential jurist, and we’re proud that he went to this school. I don’t know anything about what happened.

On to the housing market, then. Do you think lawyers bear any responsibility for the mortgage crisis?

I don’t know whether lawyers had a role in this. You certainly had mortgage companies aggressively marketing mortgages to people who couldn’t afford to pay back those mortgages.

My view of this is that too few lawyers were involved, not too many. One of the problems with real estate transactions is that a lot of people go into them without a lawyer so they don’t know what they’re buying.

Why don’t they use lawyers?

One reason is that people are stretching to get the home in the first place. And who wants to spend another thousand dollars when the broker is telling you, “I’ll do all the work for you”? The lender is telling you what to do and the broker is telling you what to do, so people think the lawyer is a luxury.

Would more lawyers really have made a difference?

I’m not naïve enough to believe that if a lawyer said you might have trouble paying this loan in the future [that people would have listened]. Some people would still go ahead anyway. But some people now say they didn’t know the mortgage was going to go up, and I believe they didn’t know.

What’s your broader view of how we got into this mess?

Fundamentally, what’s happened is that over the past five-to-ten years, people stopped viewing houses as places to live in, and started viewing them as speculative investments, or as hobbies. So you were seeing all these cable TV programs about buying a house and renovating a house, and it became a terrific sport. So people were buying homes and lenders were financing homes and it wasn’t based upon what people could realistically pay.

What’s the right response?

You want people to have access to credit to take out loans and buy homes. So you don’t want to regulate too much. At the same time, you want to regulate practices that we know are going to lead to trouble. For example, I’ve never understood why banks lend more than 100% [of the purchase price]. You’re creating a huge moral hazard problem on the part of the borrower because they have no skin in the game, so they just walk away.

Another issue, which is more tricky, is that you shouldn’t lend to people who have no ability to pay back. Banks were lending on the value of the homes, not on the ability of the borrower. They were doing no-doc loans, so they had no idea what the assets were. So, as a lender, you were lending on property and then just saying you’ll take the property back. But in many cases the property wasn’t worth what it was worth.

You teach real estate. Has interest remained strong among UCLA students?

There’s still a strong interest in real estate. All the books about how to make a million in real estate are turning into how you can make a million in foreclosures. Americans have a love affair with real estate, because it’s one of the few types of investments that’s accessible to the average person, which is partly what got us into trouble.

How exactly did that get us into trouble?

What other investment can someone working in a middle-class job leverage at a 9:1 ratio?. And part of the problem that led to the bubble was not only that you could you borrow at 9:1, but sometimes at 10:0. People were putting no money down and could still buy homes. You had a continual pounding on these people of the American dream: Go buy a house! Everyone should buy a house!

That’s sort of depressing. Let’s switch gears. You’re an East Coast guy. Grew up in New York, went to Princeton, taught at NYU. How do you like L.A.?

I’d only been in L.A. for two or three days prior to moving here. It’s a great city. L.A. is what the rest of the country is going to look like. L.A. has always been the future. Think about the movie industry. For good and bad, the spread-out nature of L.A. is affecting all parts of the country.

OK Dean Schill, thanks again for the convo. Give a call if you’re ever back in New York.

Thanks. Will do.

Full post as published by Law Blog - WSJ.com on June 12, 2008 (boomark / email).