Environmental superliens and the problem of mortgage-backed securitization

Washington and Lee Law Review, Winter 2002 by Nash, Jonathan Remy

I. Introduction

On January 23, 1980, New Jersey, one ofthe leading state laboratories for environmental regulation,1 enacted a new provision of its environmental laws. That provision allowed the state environmental agency to obtain a lien against environmentally-contaminated property to recover funds that the state expends, under state environmental law, to remediate any contamination.2 This lien, however, was not ordinary; it was, rather, a "superlien," which is a lien that enjoys priority as to other liens against the contaminated property even if such other liens predate the state's lien.3 Attracted by the prospect of increasing the likelihood of recovering funds expended on environmental cleanups, a number of states followed New Jersey's lead and enacted superlien statutes during the 1980s; thus, for a time it seemed that a trend was developing.4

tial mortgages with ties to the federal government, the Federal National Mortgage Association (FNMA or Fannie Mae), also pressured Massachusetts in a similar manner.8

The action taken by Freddie Mac and Fannie Mae resulted in tangible consequences on the housing market in Massachusetts.9 Further, the threat of a more extensive withdrawal from the state by Freddie Mac and Fannie Mae raised the specter of additional adverse consequences for the Massachusetts mortgage and housing industries, as well as for homebuyers. This additional threat convinced the Massachusetts legislature to pass an amendment within a month that exempted "real property the greater part of which is devoted to single or multi-family housing" from the scope of its superlien provision.10

Some states have repealed their superlien statutes,15 and only one state has enacted a superlien statute since the end of 1990.(16)

According to the prevailing wisdom, the mortgage lending industry vigorously opposed state superlien statutes because superlien statutes decreased the return lenders could expect from foreclosures on defaulted mortgage loans and, as a result, would substantially increase the price of borrowed funds. In this Article, I argue that this prevailing wisdom is flawed. I demonstrate the insignificance of the immediate economic impact of superlien statutes on residential mortgage borrowers." I then explain that the real cost of superlien statutes to lenders is the nonuniformity that they introduce between states in the laws governing lien priority - and the possibility of future extensions of this nonuniformity into other areas of state law governing lien priority.

The fact that the immediate economic impact of a superlien statute on mortgage pricing remains small suggests that securitization promoters may choose simply to price mortgages from different states without regard to the variations in law across the states. For example, the industry responded to nonuniformity in mortgagor protection laws across state lines in this manner.18 However, as evidenced by the experience in Massachusetts,19 residential real estate mortgage securitization promoters disfavored state enactments of superlien statutes.

to that risk, and instead to demand that residential mortgage liens not be subject to superlien legislation, arises from the nature of the nonuniformity in state laws introduced by superlien statutes.20 In particular, state superlien statutes create nonuniformity in the law in an area that has been a cornerstone of the securitization movement - the predictability of lien preference ordering. If the mortgage lending industry permits any nonuniformity in the laws governing lien preference ordering, it risks relinquishing control over the future growth and expansion of such dissimilarities. The relatively recent dramatic rise in the practice of securitizing mortgages makes this kind of nonuniformity a serious concern. Nonuniformity of this type may affect significantly the bundling of mortgages from different states and result in substantial costs for mortgage lenders and promoters. Moreover, to the extent that mortgage pools do not transcend state lines, many of the benefits that society draws from securitization - including lower interest rates, nationalization of real estate capital markets, and increased cash flow into real estate capital markets - dissipate.

My analysis and conclusions are important in at least three respects. First, they explain the actions of promoters of residential mortgage securitizations in opposition to state environmental superlien statutes. I conclude that securitization promoters consider state superlien statutes a substantial threat to their business because mortgage lending practices and law in the residential arena are especially uniform across state lines and securitization of residential mortgages relies substantially on that uniformity. Accordingly, I predict that these promoters will act to ensure that states do not broaden existing statutes or enact new statutes whose scope would extend to residential mortgage lending.

loans than do residential mortgage pools; thus, it is more difficult to dilute price differentials on the commercial side. Moreover, superlien statutes probably impose greater pricing differential in the commercial setting than in the residential setting. In light of this, it seems that opposition to superlien statutes that apply to commercial lending should increase in coming years. In particular, pressure on states to repeal such statutes should grow.