Essential reading for professional investors, risk managers, regulators, central bankers, and real estate professionals, Risk in the Global Real Estate Market: International Risk Regulation, Mechanism Design, Foreclosures, Title Systems, and REITs takes an international look at the ways in which U.S.-style constitutional laws, financial laws, and real estate laws in various countries affect global economics and risk; and analyzes specific constraints that deter market development such as Asset Liability Matching, inappropriate financial products, land title systems, inefficient constitutions and human biases.
The sub-prime mortgage crisis (that began around 2006) and the Global Financial Crisis of 2007–2010 disrupted the economies of various countries and exposed many of the psychological, social, and economic problems inherent in the legal/risk infrastructure for mortgages, land title systems, REITs, securitization, and pensions. In this remarkable new book, Michael Nwogugu explains how these processes and statutes are unconstitutional and inefficient, and how they influence demand for housing, real estate prices, retirement savings, household wealth, consumer disposable income, marriage opportunities, job markets, crime, and regional economic growth. The resulting major economic and public health problems have continued to reduce the quality-of-life of nations, and continue to cause permanent declines in wealth, increases in crime and delinquency, high divorce rates, depression, and inadequate job creation, among other problems. The book examines a range of fields—including mechanism design, psychology, risk finance, and corporate governance; and emphasizes Constitutional economics as a distinct dimension of risk analysis.
Risk in the Global Real Estate Market makes a compelling case about how constitutional torts increase information asymmetry, transaction costs, agency problems, and compliance costs, as well as inefficiency in real estate transactions. These problems, the book argues, are not unique to the United States, but also affect Commonwealth countries and other nations that have developed regulations that are similar to, or are based on U.S. commercial, securities, and or constitutional laws.
Risk in the Global Real Estate Market presents a novel analysis of the sub-prime crisis (that first began in 2006), the failure of securitization (CMBS/MBS) markets, the Global Financial Crisis, and socio-economic problems caused by traditional mortgages and securitization. The book reveals that many of the statutes and processes that define mortgages, foreclosures, securitization, and REITs in the United States (and many common-law countries and nations that have adopted American-style real estate regulations) are fundamentally unconstitutional and inefficient, and have lasting negative effects on consumer psychology, the demand for real estate, price discovery in property markets, economic growth, and quality of life. The book examines the nature of constitutional torts and property rights as the foundation for business transactions and economic growth within the context of risk regulation, interstate commerce, takings, and legislation.
Risk in the Global Real Estate Market introduces new theories of consumer psychology and institutional dynamics in real estate transactions; presents new theories of takings, and also surveys psychology/psychiatry studies (based on data from various countries) that confirm the harmful effects of mortgages, securitization, and foreclosures. Using elements of mechanism design, Michael Nwogugu develops new efficient financial products (Mortgage-Alternatives products), and presents a policy framework for a unified “Mortgage-Alternatives” market for the CEE/CIS region and China. He also explains why Asset Liability Matching hinders lending, capital formation and risk management, especially in developing countries.
The sub-prime mortgage crisis (that began around 2006) and the Global Financial Crisis of 2007–2010 disrupted the economies of various countries and exposed many of the psychological, social, and economic problems inherent in the legal/risk infrastructure for mortgages, land title systems, REITs, securitization, and pensions. In this remarkable new book, Michael Nwogugu explains how these processes and statutes are unconstitutional and inefficient, and how they influence demand for housing, real estate prices, retirement savings, household wealth, consumer disposable income, marriage opportunities, job markets, crime, and regional economic growth. The resulting major economic and public health problems have continued to reduce the quality-of-life of nations, and continue to cause permanent declines in wealth, increases in crime and delinquency, high divorce rates, depression, and inadequate job creation, among other problems. The book examines a range of fields—including mechanism design, psychology, risk finance, and corporate governance; and emphasizes Constitutional economics as a distinct dimension of risk analysis.
Risk in the Global Real Estate Market makes a compelling case about how constitutional torts increase information asymmetry, transaction costs, agency problems, and compliance costs, as well as inefficiency in real estate transactions. These problems, the book argues, are not unique to the United States, but also affect Commonwealth countries and other nations that have developed regulations that are similar to, or are based on U.S. commercial, securities, and or constitutional laws.
Risk in the Global Real Estate Market presents a novel analysis of the sub-prime crisis (that first began in 2006), the failure of securitization (CMBS/MBS) markets, the Global Financial Crisis, and socio-economic problems caused by traditional mortgages and securitization. The book reveals that many of the statutes and processes that define mortgages, foreclosures, securitization, and REITs in the United States (and many common-law countries and nations that have adopted American-style real estate regulations) are fundamentally unconstitutional and inefficient, and have lasting negative effects on consumer psychology, the demand for real estate, price discovery in property markets, economic growth, and quality of life. The book examines the nature of constitutional torts and property rights as the foundation for business transactions and economic growth within the context of risk regulation, interstate commerce, takings, and legislation.
Risk in the Global Real Estate Market introduces new theories of consumer psychology and institutional dynamics in real estate transactions; presents new theories of takings, and also surveys psychology/psychiatry studies (based on data from various countries) that confirm the harmful effects of mortgages, securitization, and foreclosures. Using elements of mechanism design, Michael Nwogugu develops new efficient financial products (Mortgage-Alternatives products), and presents a policy framework for a unified “Mortgage-Alternatives” market for the CEE/CIS region and China. He also explains why Asset Liability Matching hinders lending, capital formation and risk management, especially in developing countries.
Table of Contents
Preface xviiCHAPTER 1 Regulation and Constitutional Torts 1
Federalism, Preemption, and Risk 2
The Restoring American Financial Stability Act of 2010 (RAFSA) 6
The Existing “Tests” for Unconstitutionality 6
Quasi Constitutions 10
Social Capital 10
References 11
CHAPTER 2 A Critique of Mechanism Design 13
Conclusion 16
Reference 16
CHAPTER 3 General Public Health and Social Psychology Issues in Global Housing Markets and Mortgage Markets 17
Survey of Public Health Problems Caused by Traditional Mortgages and Foreclosures 18
Conclusion 32
References 32
CHAPTER 4 Public Health Issues: Psychological Factors Inherent in Housing Demand, Mortgage Demand, and House Prices 37
Proposition 1: Credit Bias 44
Proposition 2: The S&L Crisis Effect 44
Proposition 3: Tenure Bias 45
Proposition 4: Low Willingness to Accept Losses (WTAL) 46
Proposition 5: Investment Horizon Effect 46
Proposition 6: The Deferred-Disutility/Deferred Pain Bias 47
Proposition 7: The Lender-Experience Effect 48
Proposition 8: The Government Intervention Effect 49
Proposition 9: The Multiple-Listing-Service (MLS) Effect 50
Proposition 10: Psychological Limitations on Supply of Housing Units 50
Validity of Housing Demand Models 52
Conclusion 53
References 53
CHAPTER 5 Behavioral Biases in Property Taxation and Property Appraisal 59
Biases in Property Taxation 60
Psychological Effects and Biases Inherent in Property Appraisal 64
Conclusion 76
References 77
CHAPTER 6 Foreclosure Statutes and Processes 83
Foreclosures Reduce the Efficiency of Monetary Policies and Fiscal Policies 83
Some Adverse Contagion Effects of Foreclosures 84
The Statutory Ban of Waiver of Judicial Foreclosure in Conveyancing Documents and the Omission of Nonjudicial Foreclosure from States’ Laws Are Unconstitutional 85
The Borrower’s Post-Foreclosure Right of Redemption Is Unconstitutional 93
The Unconstitutionality of Preemptive Foreclosure Rules 98
Enforcement of Core Foreclosure Processes and the Failure to Enact Uniform Federal Foreclosure and Mortgage Statutes Constitute Violations of the U.S. Constitution 103
Alternative Foreclosure Systems 109
New Theories of Takings 109
Conclusion 112
References 112
CHAPTER 7 Unconstitutionality of U.S. Bankruptcy Code, Preemption of State-Law Mortgage Foreclosure Statutes, and Related Economic Effects 115
Existing Literature 116
Survey of Macroeconomic Effects of Bankruptcy Codes 118
The Financial Accelerator Theory Is Inaccurate 126
Criteria for Preemption: Equitable Subordination, Fraudulent Transfers (the “Reasonably Equivalent Value” Doctrine), the Deprizio Controversy, and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 127
The U.S. Supreme Court’s Standards for Preemption Cases 132
New Standards for Preemption Cases 135
Constitutional Law Issues 139
Due Process Rights 140
The Separation-of-Powers Doctrine 144
A New Theory of Takings 144
Conclusion 145
Note 146
References 147
CHAPTER 8 Mortgages and Deeds of Trust 151
Improper Coupling/Combinations of Mortgage Markets, Rental Markets, Savings/Investment Markets, and Property-Value Markets 152
Mortgages Cause Fraud and Misallocation of Risk 153
Traditional and Alternative Mortgages Are Inefficient and Create Wrong Incentives 154
Mortgages Reduce the Efficiency of Monetary Transmission 155
The Mortgage Wealth Illusion: Inefficient Household Allocations and Reduction of the Marginal Propensity to Save 160
Traditional and Alternative Western Mortgages Reduce Socioeconomic Flexibility that Substantially Affects Psychological Well-Being 161
Traditional and Alternative Mortgages Distort the Marriage Market 162
Traditional Western Mortgages and Alternative Mortgages Distort the Job Market 163
The Statutory or Common Law Prohibition of Prepayment Penalty/Yield Maintenance or Limitations on Prepayment Penalty on Default Are Unconstitutional 165
The Lack of Definition of the “Future Advances” Clause in Mortgages Constitutes a Violation of the U.S. Constitution 172
The Government’s Failure to Enact Statutes that Define the Qualifications/Characteristics of a First Mortgagee 173
The Lender’s Right to Receive Proceeds of Insurance and Condemnation (Arising from Real Estate) Is Not Codified 176
Anti-Deficiency Statutes Are Unconstitutional and the Lender’s Right to Deficiency Judgment Must Remain Enforceable 180
New Theories of Takings 190
Conclusion 191
Notes 192
References 192
CHAPTER 9 Subprime Lending Is Unconstitutional 197
The State-Action Requirement: The Substitution Theory and Failure-to-Act as State Action 198
Subprime Lending Is Unconstitutional 198
Conclusion 201
Note 201
References 202
CHAPTER 10 Constitutionality of Real Property Title Systems 205
The Recording System and the Registration/Torrens System Are Unconstitutional 205
The Uniform Commercial Code (UCC), Title Systems, and Conflict of Laws 213
Conclusion 217
References 218
CHAPTER 11 Constitutionality of Real Estate Investment Trusts 219
The REIT Ownership-Concentration Rules Are Unconstitutional 227
The Regulation of REITs by U.S. States Constitutes Violations of the U.S. Constitution 233
The Entire REIT-Qualification Statutes (IRC Section-856, RMA, and AJCA REIT-Qualification Rules) Are Unconstitutional 235
The Mandatory REIT Dividend Payout Rule Violates the U.S. Constitution 242
The Government’s Failure to Regulate Management Agreements of REITs Constitutes a Violation of the Equal Protection Clause of the U.S. Constitution 245
REITs Are Unconstitutional Because They Result in Illegal Misconduct 246
A New Theory of Takings 246
Conclusion 247
References 247
CHAPTER 12 Asset Securitization Is Unconstitutional and Should Be Banned 249
Securitization Dampens Monetary Transmission and
Provides Wrong Incentives for Banks and Sponsors 250
Securitization Increases Transaction Costs, Systemic Risk, Inflation, and Hedging Costs 257
Securitization Constitutes a Violation of the Commerce Clause of the U.S. Constitution 260
Securitization Constitutes a Violation of the Free Speech Clause 261
Securitization Constitutes a Violation of the Right-to-Contract Clause of the U.S. Constitution and Is Illegal 262
Securitization Constitutes a Violation of the Equal Protection Clause 263
Securitization Constitutes a Violation of the Separation of Powers Doctrine 264
The Elements of Required New Regulations 265
The Implications of Change 267
Conclusion 269
References 270
CHAPTER 13 Recommendations for the Development of a Mortgage and Mortgage-Alternatives Market in the CIS Region, the CEE (Central and Eastern Europe) Region, and China 271
Surveys and Needs Assessment 277
Coordination among Institutions in CIS/CEE Countries and China 278
Establishment of Mortgage and Real Estate Research Networks (Institutes) 279
The Mortgage-Alternatives Funds 280 Legal Infrastructure 281
Credit Ratings Systems 293
Taxation 298
Pension Reform 300
Accounting and Transparency/Disclosure 300
Central Banks 301
Mortgage Insurance 302
Home-Equity Mortgages 303
Primary Mortgage Markets 304
Creation of Secondary Mortgage-Alternatives Markets 307
Statutory Ban of Traditional “Western” Securitization 308
Alternatives to Foreclosure 308
The Price-Discovery Process and Viability of Mortgage-Alternatives Markets 309
Monitoring Alternatives to Primary and Secondary Mortgage-Alternatives Markets 311
Incentives for Banks and Financial Institutions 314
Incentives for Borrowers/Buyers to Use Mortgage Alternatives 315
Risk-Management and Risk-Transfer Systems 315
References 316
CHAPTER 14 Asset-Liability Matching Is a Hindrance to Lending 323
Errors in the Formulas for Duration, Modified Duration (MD), and Convexity 324
Default/Bankruptcy Risk and Illiquidity 330
Existing Liquidity Derivatives (Swaps and Options) Are Inaccurate and Inefficient 337
Possible Solutions to the Perceived ALM Problem 339
Constitutionality of Central Bank Restrictions on Daily Cash Withdrawals by Customers 341
Conclusion 344
References 344
CHAPTER 15 New Mortgage-Alternative Products for Primary Mortgage Markets in China and CIS/CEE Countries 349
The Adjustable Balance Mortgage 351
The Continuous Workout Mortgage, Shared Appreciation Mortgages (SAMs), Shared Income Mortgages (SIMs), and Shared Equity Mortgages (SEMs) 353
Traditional Alternative Mortgages 354
Indexed Mortgages 356
Islamic Finance Products 357
Cooperative Mortgages 359
The Pricing of Mortgages and Behavioral Finance—Most Models Are Inaccurate 359
Distortion of Economic Data and National Accounting 363
Banks/Lenders as Seller-Lenders (Installment Sales Contracts and Installment Land Contracts); and Banks as Real Estate Brokers 364
Renegotiation and Sequential Investments 368
Recursion of Mortgages and the Perception of Defaults as Low-Probability Events 372
Characterization of the New Mortgage-Alternative Products 374
The New Mortgage-Alternative Products 381
Conclusion 410
Notes 410
References 411
CHAPTER 16 Conclusion 419
References 421
About the Author 423
Index
