Real estate practice in the twenty-first century

Missouri Law Review, Fall, 2007 by Ann M. Burkhart

I. 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)