Controlling residential stakes

University of Chicago Law Review

Volumn 77, Issue 1, 2010, Pages 143-176

  Fennell, Lee Anne ^a   Roin, Julie A ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 77955501596     PISSN: 00419494     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (255)

1. We use the term "abandonment" here in its colloquial sense, to refer to an owner's decision to cease all payments and upkeep associated with a property and to vacate the premises. The common law does not permit owners to abandon real property in the legal sense of unilaterally terminating ownership.
2. See Lior Jacob Strahilevitz, The Right to Abandon, 158 U Pa L Rev 355, 359-60, 399-402 (2010).
3. See notes 30-36 and accompanying text.
4. "NIMBY" is an acronym for "not in my back yard." See William A. Fischel, Homevoter Hypothesis 9 (Harvard 2001). Fischel posits that homeowners vote in ways that will protect and enhance the value of their largest assets-their homes. Id at 9-12. Risk aversion plays an important role in Fischel's account, making homeowners into NIMBYs even when a proposed change carries a positive expected value. See id.
5. See also Brendan O'Flaherty, City Economics 384 (Harvard 2005) (giving an example illustrating Fischel's point and concluding that homeowners' "stake in the community-the community as it now stands-is too big").
6. The home is the single largest financial asset for most US homeowners. See Brian K. Bucks, Arthur B. Kennickell, and Kevin B. Moore, Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, 92 Fed Reserve Bull A1, A22-23 (2006), online at http://www. federalreserve.gov/pubs/oss/oss2/2004/bull0206.pdf (visited Nov 13.2009).
7. Fischel, Homevoter Hypothesis at 4 (cited in note 3). Because the home is a highly undiversified investment, homeowners tend to be risk averse with respect to changes that might affect its value.
8. See Fischel, Homevoter Hypothesis at 9 (cited in note 3).
9. O'Flaherty, City Economics at 384 (cited in note 3).
10. See Fischel, Homevoter Hypothesis at 15 (cited in note 3) ("In the places where most people live-suburbs, towns, and small cities-homeowners have become the dominant political force.").
11. Consider Richard Thompson Ford, The Boundaries of Race: Political Geography in Legal Analysis, 107 Harv L Rev 1841, 1871 & n 74 (1994) (noting the "self-perpetuating quality" of exclusionary zoning and other efforts directed at "community self-definition").
12. The literature reflects a spectrum of views about the appropriate future direction for homeownership. Compare generally, for example, A. Mechele Dickerson, The Myth of Home Ownership and Why Home Ownership Is Not Always a Good Thing, 84 Ind L J 189 (2009) (questioning governmental promotion of homeownership for all and recommending that homeownership subsidies be strictly curtailed).
13. Andrew Caplin, et al, Facilitating Shared Appreciation Mortgages to Prevent Housing Crashes and Affordabilily Crises (Hamilton Project Discussion Paper No 2008-12. Sept 2008), online at http://www.brookings.edu/papers/2008/09- mortgages-caplin.aspx (visited Nov 13, 2009) (urging innovation in home finance through shared appreciation mortgages).
14. A paper currently under development examines the potential role of local governments in devising and financing innovative new institutional approaches to homeownership. Benito Arruñada and Amnon Lehavi, Prime Property Institutions for a Subprime Era: Exploring Innovative Models of Residential Development and Finance (March 2010) (on file with authors). For previous work on the past or potential role of local governmental bodies in altering the stakes of residents, see, for example, the sources cited in notes 58-60, 96.
15. See Part III.A.
16. See note 44 and accompanying text.
17. See Parts II.A and III.A (discussing and critiquing these possibilities).
18. See Parts II.B and III.B.
19. Many approaches to reconfiguring homeownership risk have been proposed. See, for example, Andrew Caplin, et al, Housing Partnerships: A New Approach to a Market at a Crossroads 6 (MIT 1997) (proposing a "housing partnership" approach in which an investor contributes to the home's purchase price and shares in the home's sales proceeds).
20. Robert J. Shiller, Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks 78-88 (Oxford 1993) (advocating markets in housing futures and options that would permit homeowners to hedge the risk of housing market fluctuations).
21. See generally Lee Anne Fennell, Homeownership 2.0, 102 Nw U L Rev 1047 (2008) (discussing literature on these and other homeownership-risk-reallocation approaches, and proposing a new tenure form).
22. *2-3 (Urban Institute Opportunity and Ownership Project No 8, May 2007), online at http://www.urban.org/publications/311457.html (visited Nov 13, 2009) (proposing that instruments indexed to area rents be made available to tenants, whether structured as insurance against rent increases or as tradable options).
23. See also O'Flaherty, City Economics at 369 (cited in note 3) ("Tenants could get a long-run stake in the community if they were required to buy some variety of security that was pegged to the town's or neighborhood's total property value."); Part III.B.
24. See Part IV.B.
25. See Part IV.A.
26. See, for example, Christopher Mayer, Karen Pence, and Shane M. Sherlund, The Rise in Mortgage Defaults, 23 J Econ Persp 27, 30-33, 36-40, 43-44 (2009) (describing the use of "piggyback loans" (second mortgages) that reduce or eliminate any down payment requirement, low- and no-documentation mortgages, adjustable-rate mortgages with "teasers," and loans with low, zero, or negative amortization of principal).
27. Edward M. Gramlich, Subprime Mortgages: America's Latest Boom and Bust 13-22 (Urban Institute 2007) (chronicling changes in mortgage practices from the postwar period onward, including the recent expansion of the subprime lending sector).
28. In 2007, about 7 percent of owner-occupied units were manufactured or mobile homes or trailers while another 6 percent consisted of condominiums or cooperatives. US Census Bureau, American Housing Survey for the United States: 2007, table 1A-1. online at http://www.census.gov/prod/2008pubs/h150-07.pdf (visited Nov 13, 2009). By contrast, in 1980, a mere 2.67 percent were condominiums or cooperative apartments. The growth in manufactured homes occurred a decade earlier; they constituted 4.39 percent of owner occupied homes in 1970, 5.79 percent in 1980, and 7 percent in 2007.
29. Id.
30. US Census Bureau, Annual Housing Survey: 19801 table A-1 (GPO 1982), online at http://www2.census.gov/prod2/ahsscan/h150-80a.pdf (visited Nov 13, 2009).
31. See Ruth Simon and James R. Hagerty, One in Four Borrowers Is Underwater, Wall St J A1 (Nov 24, 2009) (reporting that 23 percent of homeowners with mortgages had negative equity in the third quarter of 2009, according to First American CoreLogic).
32. See also Joint Center for Housing Studies of Harvard University, The State of the Nation's Housing 2009 19 (2009). online at http://www.jchs.harvard. edu/publications/markets/son2009/son2009.pdf (visited Nov 13, 2009) ("2009 Housing") (reporting Zillow.com's estimate that 42 percent of existing home sales in 2008 were effected "for a loss," below either the seller's purchase price, the outstanding mortgage balance, or both).
33. See, for example, Mortgage Bankers Association, Delinquencies Continue to Climb in Latest MBA National Delinquency Survey (Nov 19, 2009). online at http://www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm (visited Dec 27, 2009) (reporting, based on records that go back to 1972, that in the third quarter of 2009, "[t]he combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey").
34. See, for example, Todd J. Zywicki and Joseph D. Adamson, The Law and Economics of Subprime Lending, 80 U Colo L Rev 1, 30 (2009) (observing that "even if a deficiency judgment is formally available, borrowers may be judgment-proof because of a general lack of other assets").
35. *2 (Federal Reserve Bank of Richmond Working Paper No 09-10, July 2009), online at http://ssrn.com/abstract=1432437 (visited Nov 13, 2009) (finding that the availability of recourse reduces default rates among homeowners likely to have negative equity, with the magnitude of the effect depending on the homeowner's wealth).
36. See, for example, Zywicki and Adamson, 80 U Colo L Rev at 26-27 (cited in note 20) (discussing and comparing support for the "distress model" and the "option model" of foreclosure decisions). Some recent research has suggested that homeowners who put no money down when purchasing a home are disproportionately likely to default, and that those who supply their own down payments are substantially less likely to default than those who receive down payment funds from other sources. See Austin Kelly, "Skin in the Game": Zero Downpayment Mortgage Default, 17 J Hous Rsrch 75, 94-95 (2008).
37. See also Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall St J A13 (July 3, 2009) (reporting, based on analysis of loan-level data, "that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home").
38. See, for example, John Leland, Facing Default, Some Abandon Homes to Banks, NY Times A1 (Feb 29, 2008).
39. See also Zywicki and Adamson, 80 U Colo L Rev at 29 (cited in note 20) (discussing anecdotal coverage of "jingle mail" defaulters).
40. See Diana Olick, Treasury: Jingle Mail a Myth, CNBC (June 26, 2009), online at http://www.cnbc.com/id/31570460 (visited Nov 13, 2009) (quoting Michael Barr, Treasury's Assistant Secretary for Financial Institutions, that "we don't see in the data borrowers who are walking away because they can or because their homes are underwater. We do see borrowers who are unable to make the payment.").
41. *2-3 (Federal Reserve Bank of Boston Public Policy Discussion Paper No 08-3, June 2008). online at http://ssrn.com/abstract=1153413 (visited Nov 13, 2009) (finding default rates of less than 10 percent in a study of 100,000 likely underwater Massachusetts homeowners in the early 1990s).
42. *5 (NBER Working Paper No 15145, June 2009), online at http://www.nber.org/papers/w15145 (visited Nov 13, 2009). As the number of American homeowners who are deeply underwater has increased, so too has concern about the possibility of strategic defaults.
43. See David Streitfeld, No Help In Sight, More Homeowners Walk Away, NY Times A1 (Feb 3, 2010) (reporting that "by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home's value dropping below 75 percent of the mortgage balance"-a level at which even owners capable of repayment may begin to consider default, according to recent research); id (describing these homeowners as "stretched, aggrieved and restless" and noting that "[s]uggestions that people would be wise to renege on their home loans ⋯ are turning into a full-throated barrage").
44. See, for example, Zhenguo Lin, Eric Rosenblatt, and Vincent W. Yao, Spillover Effects of Foreclosure on Neighborhood Property Values, 38 J Real Est Fin & Econ 387, 403 (2009) (finding, based on Chicago-area data, significant negative effects of foreclosures on the sales prices of properties within a 0.9 kilometer radius for a five-year period).
45. Jenny Schuetz, Vicki Been, and Ingrid Gould Ellen, Neighborhood Effects of Concentrated Mortgage Foreclosures, 17 J Hous Econ 306, 317 (2008) (finding, based on a dataset of sales and foreclosures in New York City from 2000 to 2006, that close proximity to multiple foreclosures depresses sales prices, subject to a "threshold effect" in which very small clusters of foreclosures produce inconsistent results).
46. See also Raphael W. Bostic and Kwan Ok Lee, Mortgages, Risk, and Homeownership among Low- and Moderate-Income Families, 98 Am Econ Rev 310, 313-14 (2008) (discussing externalities from foreclosures).
47. See, for example, Sarah Burge, Lake Elsinore: 4-Legged Squatters Settle on a Foreclosure, Press-Enterprise C1 (Sept 3, 2008) (reporting the appearance of bobcats on foreclosed property).
48. Nick Miroff, Shuttered Homes, Thriving Wildlife, Wash Post B1 (May 27, 2008) (reporting infestations of rats, snakes, and mosquitoes).
49. For a recent overview of the literature on the community impacts of foreclosures, see G. Thomas Kingsley, Robin Smith, and David Price, The Impacts of Foreclosures on Families and Communities 13-21 (Open Society Institute Report, May 2009), online at http://www.urban.org/UploadedPDF/411909-impact-of- forclosures.pdf (visited Nov 13, 2009).
50. See also Stephanie Chen, As Dues Dry Up, the Neighbors Pay, Wall St J D1 (May 13, 2008) (noting impacts of foreclosures on common interest communities).
51. A number of cities have filed lawsuits against lenders. See, for example, Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for the Rise in Foreclosures and Abandoned Properties, 2008 Utah L Rev 1169, 1187-1232 (detailing litigation by cities against lenders). Despite dismissals in some of these actions, litigation continues.
52. See, for example, Amos Maki, Memphis, Shelby County Sue Wells Fargo Over Lending Practices, The Commercial Appeal (Dec 30, 2009) (reporting on new suit initiated by Memphis and Shelby County and noting dismissal of suits in Birmingham and Cleveland).
53. Andrew Longstreth, Judge Dismisses Cleveland's Suit against Subprime Lenders, AmericanLawyer.com (May 18, 2009), online at http://www.law.com/jsp/ tal/digestTAL.jsp?id=1202430792417 (visited Dec 27, 2009) (reporting on federal district court's dismissal of Cleveland's suit and noting city's intention to appeal to the Sixth Circuit).
54. Tricia Bishop, City's Wells Fargo Lawsuit Dismissed, Baltimore Sun (Jan 7, 2010) (reporting on federal district court's dismissal of Baltimore's lawsuit and noting new cases filed in 2009 by Illinois and Memphis).
55. Brendan Kearney, City Will Amend Reverse-Redlining Lawsuit, Maryland Daily Rec (Jan 7, 2010) (reporting on Baltimore's plans to file an amended complaint following federal district court's dismissal of its suit against Wells Fargo).
56. See, for example, Nicholas Casey, Banker: "What'd I Do Wrong, Officer?" Cop: "You've Got Algae in the Pool, Sir"-Fearing Blight, a California Town Makes It a Crime to Neglect Foreclosed Homes, Wall St J A1 (May 1, 2009) (reporting that some small towns have passed laws allowing them to charge banks with criminal misdemeanors for failing to maintain foreclosed properties).
57. Although our focus here is on community spillovers stemming from tenant undertaking, tenant households also bear understaking costs, including the possibility of displacement.
58. A large literature has examined the social benefits associated with homeownership. See, for example, Robert D. Dietz and Donald R. Haurin, The Social and Private Micro-level Consequences of Homeownership, 54 J Urban Econ 401, 438-40 (2003) (evaluating studies on homeownership effects and identifying methodological issues and gaps in the literature).
59. Donald R. Haurin, Robert D. Dietz, and Bruce A. Weinberg, The Impact of Neighborhood Homeownership Rates: A Review of the Theoretical and Empirical Literature, 13 J Hous Rsrch 119, 134-40 (2002) (surveying theoretical literature and empirical studies on the neighborhood effects of homeownership).
60. Denise DiPasquale and Edward L. Glaeser, Incentives and Social Capital: Are Homeowners Better Citizens?, 45 J Urban Econ 354, 383-84 (1999) (finding that both ownership incentives and tenure length affect social capital investments by homeowners).
61. For cautions about inferring causal relationships from outcomes or behaviors that are correlated with homeownership, see, for example, William G. Gale, Jonathan Gruber, and Seth Stephens-Davidowitz, Encouraging Homeownership through the Tax Code, 115 Tax Notes 1171, 1177(2007).
62. Haurin, Dietz, and Weinberg, 13 J Hous Rsrch at 132-33 (cited in note 31).
63. Although rising rents present tenant households with the most obvious understaking-related displacement threat, tenants can also be displaced when housing units are withdrawn from the rental market. Eminent domain is another potential source of displacement, but it presents issues that are distinct from those we address here, in part because its use does not depend on tenure form or a resident's financial stake. It is, however, possible that some of the mechanisms we discuss below could affect the frequency or impact of localities' resort to condemnation. See text accompanying note 114. Tenants can also be displaced when the property they are occupying is foreclosed upon-a fact that makes them vulnerable to downside market risk. See Mary Shanklin, Renters Becoming Victims to Home Foreclosures, Pittsburgh Post-Gazette H11 (June 7, 2009). Recent legislation provides short-run protection against foreclosure-based displacement.
64. See Protecting Tenants at Foreclosure Act of 2009 § 702, Pub L No 111-22, 123 Stat 1632, 1660-61, codified at 12 USC § 5220 note (requiring that the successor in interest provide tenants at least ninety days' notice to vacate, and mandating that the balance of existing lease terms be honored unless a buyer will occupy the unit as a primary residence).
65. *1 (cited in note 13) (reporting protests against gentrification by tenants fearful of being priced out of the market).
66. Lance Freeman and Frank Braconi, Gentrification and Displacement: New York City in the 1990s, 70 J Am Planning Assoc 39, 39-40 (2004) (describing political effects of gentrification fears).
67. For two different takes on the empirical evidence regarding the displacement effects of gentrification, compare J. Peter Byrne, Two Cheers for Gentrification, 46 Howard L J 405, 413-15 (2003) (citing studies that "find no evidence that gentrification causes significant direct displacement").
68. John A. Powell and Marguerite L. Spencer, Giving Them the Old "One-Two": Gentrification and the K. O. of Impoverished Urban Dwellers of Color, 46 Howard L J 433, 465-76 (2003) (countering with studies that "document the harmful realities of displacement"). Recent work on this question includes Freeman and Braconi, 70 J Am Planning Assoc at 45 (cited in note 34) (finding that poor households living in gentrifying neighborhoods in New York City in the 1990s were less likely to move than similar households living in nongentrifying New York City neighborhoods).
69. Kathe Newman and Elvin K. Wyly, The Right to Stay Put, Revisited: Gentrification and Resistance to Displacement in New York City, 43 Urban Stud 23, 40-42 (2006) (concluding that displacement fears were not unfounded, and noting several factors, including rent regulation, that reduced the amount of observed displacement).
70. See also Lance Freeman, There Goes the 'Hood: Views of Gentrification from the Ground Up 127 (Temple 2006) ("[T]he process of neighborhood change in gentrifying neighborhoods is often gradual, driven more by succession or a change in who moves into the neighborhood than rapid and widespread displacement.").
71. See Newman and Wyly, 43 Urban Stud at 49 (cited in note 35) (explaining that overcrowding is the only way for some low-income residents to stay in gentrifying areas).
72. Over twice as many owner-occupied homes are unencumbered by mortgages as are "underwater." See Simon and Hagerty (cited in note 18) (citing Census Bureau data indicating that "nearly 24 million owner-occupied homes don't have any mortgage," compared with 10.7 million households with negative equity in their homes).
73. As of January 2010, the unemployment rate was 9.7 percent, nearly double the rate posted two years earlier. See Bureau of Labor Statistics, The Employment Situation: January 2010 1 (Feb 5, 2010), online at http://www.bls.gov/news.release/pdf/empsit.pdf (visited Feb 19, 2010).
74. Fischel, Homevoter Hypothesis at 75-76 (cited in note 3).
75. See, for example, id at 268 ("Asset risk is a good thing when it makes homeowners pay attention to the quality of schools and municipal services. It helps overcome the free-rider problem that is otherwise endemic to boring, local political concerns.").
76. See, for example, id at 8-10, 268-69 (noting the downside of asset risk, and observing that homeowners are often frightened by the variance of potential outcomes from neighborhood changes).
77. See, for example, id at 80-81 (noting that homeowners are "[t]he largest and most active group of voters in all but a few cities").
78. See also William A. Fischel, Political Structure and Exclusionary Zoning: Are Small Suburbs the Big Problem?, in Gregory K. Ingram and Yu-Hung Hong, eds, Fiscal Decentralization and Land Policies 111, 130-31 (Lincoln Institute of Land Policy 2008) (examining the effects of jurisdiction size and the degree of metropolitan fragmentation on local political decisions about land use).
79. A number of commentators have noted increased use of such leasing restrictions in common interest communities. See, for example, Zachary M. Rawling, Reevaluating Leasing Restrictions in Common Interest Developments: Rejecting Reasonableness in Favor of Consent, 5 J L, Econ, & Pol 223, 224 (2009).
80. David E. Grassmick, Note, Minding the Neighbor's Business: Just How Far Can Condominium Owners' Associations Go in Deciding Who Can Move into the Building?, 2002 U Ill L Rev 185, 194.
81. Katharine N. Rosenberry, Home Businesses, Llamas and Aluminum Siding: Trends in Covenant Enforcement, 31 John Marshall L Rev 443, 461-65 (1998). Governmental entities have had less success in their efforts to restrict renting through their zoning codes.
82. See Ngai Pindell, Fear and Loathing: Combating Speculation in Local Communities, 39 U Mich J Leg Ref 543, 577-81 (2006) (describing litigation over rental restrictions that suggests courts are hostile to categorical owner-occupancy requirements but may allow communities to condition the rental of accessory dwelling units on owner occupancy of the primary dwelling).
83. Many jurisdictions provide tax relief for "homestead" property, defined as property that serves as the owners' primary residence. This relief may be substantial. See, for example, Fla Const Art VII, § 4(d)(1) (imposing a 3 percent cap on annual assessment increases on homestead property)
84. Mich Comp Laws Ann § 380.1211 (West) (limiting application of school district property tax to homestead property).
85. Roy v Ducote, 399 So 2d 737 (La App 1981), involved a challenge to a subdivision restriction that prohibited homes financed through certain governmental programs. Id at 738. The defendants stated that they wished to "form a neighborhood that does not look like a 'government program' and to create a quiet, peaceful neighborhood with attractive surroundings and minimal amounts of noise and extraneous intrusions." Id at 741. The restriction was struck down on federal and state constitutional grounds. Id. More recently. Illinois experimented with implementing mortgage counseling requirements at the ZIP-code level in an effort to address subprime lending-a short-lived approach that has since been replaced by consumer protection legislation that applies at the countywide and statewide level.
86. *6-9 (Fisher College of Business Working Paper No 2008-03-019, June 2009), online at http://ssrn.com/abstract=1285603 (visited Nov 6, 2009) (describing the Illinois Predatory Lending Database Pilot Program (HB 4050), and its collapse within twenty weeks).
87. Office of the Governor, Governor Blagojevich Signs Anti-predatory Lending Law, Announces Borrower Outreach Initiative to Help Fight Foreclosures 1 (Nov 2, 2007), online at http://www.ihda.org/admin/Upload/Files/5f95c2fa-5427-423d- 9361-1cc77ba7e831.pdf (visited Nov 13, 2009) (announcing the signing of Senate Bill 1167, which includes statewide consumer lending protections as well as counseling provisions that apply throughout Cook County for first-time homebuyers and certain kinds of loans).
88. See, for example, Edward H. Ziegler, 1A Rathkopf's The Law of Zoning and Planning § 1.04 at 1-21 (West 4th ed 1982) ("[A] fundamental principle of zoning [is that] it deals basically with the use, without regard to the ownership, of the property involved.").
89. quoted in CHR General, Inc. v City of Newton, 439 NE2d 788, 791 (Mass 1982) (finding an ordinance regulating condominium conversions not authorized by the town's zoning power).
90. See Gary T. Schwartz, The Logic of Home Rule and the Private Law Exception, 20 UCLA L Rev 671, 689-90 (1973).
91. Howard Lee McBain, The Law and the Practice of Municipal Home Rule 673-74 (Columbia 1916) (citing the "common understanding" that "such general subjects as crime, domestic relations, wills and administration, mortgages, trusts, contracts, real and personal property, insurance, banking, corporations, and many others" are matters of state rather than local control). Both of the broadly influential model home rule provisions, one promulgated by the American Municipal Association and the other by the National Municipal League, explicitly provided that home rule powers would not "include the power to enact private or civil law governing civil relationships except as an incident to an exercise of an independent municipal power."
92. See Terrance Sandalow, The Limits of Municipal Power under Home Rule: A Role for the Courts, 48 Minn L Rev 643, 675 (1964) (citing language from § 6 of the American Municipal Associations Model Constitutional Provisions for Municipal Home Rule). Judicial enforcement of this exception, however, preceded the appearance of the models.
93. See Sandalow, 48 Minn L Rev at 674-85 (describing early cases recognizing private law limits on home rule powers).
94. See Schwartz, 20 UCLA L Rev at 702 (cited in note 47) ("[C]ase law tells little either way about the supposed private law exception."). For example, one could say that an ordinance preventing the rental of a unit without running water as a residence "interferes" with potential contracts or civil relationships, but it is clear that localities do exactly that when writing and enforcing their building codes. Such regulation, however, can be characterized as falling within the private or civil law exception's own exception of being "incident to an exercise of an independent municipal power"-here, the jurisdiction's zoning or building code authority.
95. See also Sandalow, 48 Minn L Rev at 676-78 (cited in note 47) ("[T]he most likely construction of the model provisions is that private law may be enacted only if it is in aid of some municipal policy or program which is expressed, at least in part, by means other than the regulation of purely civil relationships."). Of course, the bounds of these independent municipal powers are themselves open to question.
96. See CHR General, 439 NE2d at 790-92 (finding condominium conversion regulation was not incident to the municipality's exercise of its zoning power, and thus was invalid under the civil relationships exception contained in the Home Rule Amendment of the Massachusetts Constitution).
97. See Schwartz, 20 UCLA L Rev at 694 (cited in note 47). See also notes 47-48.
98. The Supreme Court recently held in Cuomo v Clearing House Association, 129 S Ct 2710 (2009), that ordinary enforcement of a state fair lending law was not preempted by the National Bank Act. Id at 2717. Although the issue involved in that case was somewhat different than those that our hypothetical regulation would present, the Court's rejection of a sweeping agency interpretation and its recognition of a role for state law is suggestive. It also may be significant that federal law expressly exempts state usury laws from preemption. See 12 USC § 85 (creating an exception to the federal interest rate limitation "where by the laws of any State a different rate is limited for banks organized under State laws"). Further, in reaching its holding in Cuomo, the Court notes that even the Comptroller of the Currency agrees that "the case law does recognize [ ] that 'states retain some power to regulate national banks in areas such as contracts, debt collection, acquisition and transfer of property, and taxation, zoning, criminal, and tort law.'" Cuomo, 129 S Ct at 2719 (internal citation omitted), quoting the Comptroller's statement of basis and purpose, which appeared in the Federal Register at 69 Fed Reg 1895, 1896 (2004). Maximum loan-to-value regulation and mandatory PMI requirements could be characterized as falling within these areas of residual state power.
99. The Court's opinion in Cuomo expressly distinguished between oversight of "corporate affairs" and "the power to enforce the law." 129 S Ct at 2716. Consider McClellan v Chipman, 164 US 347, 358-61 (1896) (holding that a state law voiding certain conveyances of real property by insolvent persons was not preempted).
100. See, for example, Walters v Wachovia Bank, NA, 550 US 1, 13 (2007) ("Beyond genuine dispute, state law may not significantly burden a national bank's own exercise of its real estate lending power, just as it may not curtail or hinder a national bank's efficient exercise of any other power, incidental or enumerated under the NBA."). To forestall preemption concerns, states may exempt national banks from regulatory regimes; state "bank parity laws" may require that exemptions applicable to national banks be extended to cover state-chartered banks as well. See, for example, 765 ILCS 77/70(a) (exempting from coverage mortgage originators exempt from coverage under the Residential Mortgage License Act of 1987, a category including both nationally chartered and state banks under 205 ILCS 635/1-4(d)(1). Obviously, such exemptions would dilute the force of the measure and distort borrower decisions.
101. It is even possible that constitutional challenges might be raised about the power to enact such regulations, if they were viewed as a mere pretext for wealth discrimination. Consider Roy, 399 So 2d at 741.
102. Such substitution can occur if (and only if) people are not already at the limit of their capacity to incur nonhousing debt. One alternative would be to limit all credit, as some other countries have done. See Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America 324-25 (Oxford 1989) (noting and critiquing this regulatory approach).
103. Given our focus on state and local initiatives and our interest in identifying politically plausible alternatives, we do not discuss another issue relevant to residential stakeholding in the United States-the substantial federal income tax advantages granted to homeowners. These advantages include, subject to some limits, deductions for home mortgage interest and property taxes, as well as an exemption from tax of gains generated from the sale of a primary residence. See 26 USC §§ 121, 163(h), 164(a).
104. See, for example, William A. Fischel, An Economic History of Zoning and a Cure for Its Exclusionary Effects, 41 Urban Stud 317, 335 (2004) (proposing "selective home equity insurance" as a way "to make home-owners less anxious about development in their communities while still retaining the desirable incentives that home-ownership provides").
105. Adam Yarmolinsky, Reassuring the Small Homeowner, 22 Pub Interest 106, 106 (Winter 1971) (suggesting that homeowners may "become less resistant to mixed housing" if protected against loss on their housing investment).
106. See, for example, Matityahu Marcus and Michael K. Taussig, A Proposal for Government Insurance of Home Values against Locational Risks, 46 Land Econ 404, 408-12 (1970) (outlining a proposal for a Home Owners' Insurance Corporation designed to insure homeowners against "locational risks" to home values); Yarmolinsky, 22 Pub Interest at 106 (cited in note 56) (advocating "a simple and quite inexpensive public insurance scheme" to protect homeowners against loss on sale attributable to factors other than "physical deterioration or damage to the home itself).
107. See, for example, Maureen A. McNamara, Comment, The Legality and Efficacy of Homeowner's Equity Assurance: A Study of Oak Park, Illinois, 78 NW U L Rev 1463, 1468-69 (1984) (noting program does not protect against declines in value attributable to a decline in the prices of homes in the larger Chicago-Cook County area). A variety of other conditions and limitations applied. For example, the plan covered only 80 percent of qualifying losses and also excluded from coverage declines in value attributable to damage to the property in question.
108. See Id.
109. See, for example, Robert J. Shiller, Radical Financial Innovation, in Eytan Sheshinski, Robert J. Strom, and William J. Baumol, eds, Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies 306, 316 (Princeton 2007) (noting that programs similar to Oak Park's were created in a number of localities in Illinios and other states).
110. Liz Hersh, Profile of Existing Home Equity Assurance Programs 1-2 (Summary Report on Home Equity Assurance to the Urban Issues Task Force of 10,000 Friends of Pennsylvania, Fall 2001), online at http://www.pauljsentner. com/no-wehav/referenc.all/homeqcha.rts/heqchts-.doc (visited Nov 13, 2009) (reporting data from nine programs located in four states).
111. *12-17 (Yale International Center for Finance Working Paper No 03-12, May 2003), online at http://ssrn.com/abstract-id=410141 (visited Nov 7, 2009).
112. See, for example, Sarah Max, Selling L.A., Buying Chicago, CNNMoney.com (Aug 9, 2004), online at http://money.cnn.com/2004/08/06/real-estate/investment- prop/hedging/index.htm (visited Nov 13, 2009) ("Since the [Syracuse] program was launched in August 2002, only 76 homeowners have signed up, according to its director[,] Virginia Smith.").
113. Hersh, Profile of Existing Programs at 1-2 (cited in note 59) (showing relatively low participation rates for nine surveyed programs, although a few programs in Chicago have attracted hundreds or thousands of households and at least two of them appear to be growing).
114. *28 (cited in note 60) (suggesting that even where participation in a home equity insurance program is low, there might be positive effects for the community such as increased confidence). Paid claims have been low to nonexistent in such programs.
115. See, for example, Hersh, Profile of Existing Programs at 1-2 (cited in note 59).
116. See, for example, J. Peter Byrne and Michael Diamond, Affordable Housing, Land Tenure, and Urban Policy: The Matrix Revealed, 34 Fordham Urban L J 527, 541-51 (2007) (describing how resale limits involve tradeoffs between the wealth creation and housing goals of subsidized homeownership programs).
117. John Emmeus Davis, Shared Equity Homeownership: The Changing Landscape of Resale-Restricted, Owner-Occupied Housing 65 (National Housing Institute 2006) (describing resale restrictions applicable to shared equity housing and identifying a variety of formulas for capping the portion of the sales proceeds the homeowner can receive).
118. Duncan Kennedy, The Limited Equity Coop as a Vehicle for Affordable Housing in a Race and Class Divided Society, 46 Howard L J 85, 87 (2002) (advocating the development of "limited equity coops" which would allow owners to recoup only their initial investment plus the value of their improvements, along with an inflation adjustment and perhaps a limited share of appreciation, on resale).
119. *5-6 (Center for Housing Policy, Policy Brief, Apr 2007), online at http://www.ncbcapitalimpact. org/uploadedFiles/downloads/JacobusLubelloptions4-07.pdf (visited Nov 13, 2009) (describing a spectrum of ways to structure affordable homeownership through equity sharing and subsidy repayment alternatives, with choices among them framed in terms of the tradeoff between the goals of wealth creation and the preservation of affordable housing).
120. See, for example, Andrew Caplin, et al, Shared-Equity Mortgages, Housing Affordability, and Homeownership, 18 Hous Pol Debate 209, 217 (2007) (noting the affordability advantages of "more innovative mortgages that bridge the gap between debt and equity").
121. Andrew Caplin, et al, Innovative Approaches to Reducing the Cost of Home Ownership 7-8 (Menzies Research Centre, June 2003), online at http://www.mrcltd.org.au/research/home-ownership/volume-1.pdf (visited Nov 7, 2009) (proposing the development of equity financing techniques).
122. One of us has elsewhere suggested that the offloading of upside and downside risk associated with off-site factors could be combined in a new default tenure form. Fennell, 102 Nw U L Rev at 1071-73 (cited in note 12) (outlining a "Homeownership 2.0" tenure form where homeowners bear the risk for the consumption and on-site investment components of homeownership while outside investors bear the investment risk associated with off-site factors, including local changes in housing values).
123. There are a variety of ways to accomplish this disaggregation, albeit imperfectly, including the use of housing price indexes.
124. See, for example, id at 1073-78 (describing methods for disaggregating neighborhood and on-site effects).
125. Robert J. Shiller and Allan N. Weiss, Home Equity Insurance, 19 J Real Est Fin & Econ 21, 25-26 (1999) (explaining how the use of housing indexes overcomes moral hazard and selection bias problems that would otherwise afflict homeownership insurance schemes).
126. We assume here that the proceeds from alienating upside potential would be larger than the premium required to insure against downside loss.
127. When effectuated with respect to marketable stocks, securities, or commodities, this arrangement is denominated a "collar." See Jeffrey L. Rubinger, Tax Planning Strategies with Equity Derivatives, 76 Fla Bar J 45, 45 (Apr 2002) (explaining that a collar is a combination of a put option and a call option on the underlying shares of stock). Typically businesses and investors enter into collars to lower the cost of hedging against unfavorable price movements, as collars have a lower cash price than one-way options. The cash discount comes from the sale of the rights to the gains generated by favorable price movements.
128. See Fred D. Arditti, Derivatives: A Comprehensive Resource for Options, Futures, Interest Rate Swaps, and Mortgage Securities 135 (Harvard 1996) (describing an interest rate collar as "a trade-off of the lower cost of insuring against higher rates in exchange for parting with the reduced borrowing costs to be realized if rates are lower"). However, most collar arrangements cover explicit-and relatively short-time periods, rather than being open-ended. That is, prices, gains, and losses are determined and paid at the end of six months or a year, rather than (as envisioned in this Article) waiting until the sale of the underlying property. Settling options based on sales rather than at specific temporal intervals introduces complications in pricing that have received some attention in the literature.
129. See, for example, Shiller and Weiss, 19 J Real Est Fin & Econ at 41-43 (cited in note 66) (noting the potential for policyholders to strategically time their moves to maximize their returns if payouts were temporally unconstrained, and discussing the potential for using "life event" triggers to restrain opportunism); Caplin, 18 Housing Pol Debate at 218-19 (cited in note 64) (explaining how the borrower's costs for shared equity mortgages vary depending on the holding period and noting that "[t]he long and unpredictable nature of the payoff period appears to have been the chief reason that the Bank of Scotland withdrew its shared-equity mortgages from the market").
130. In this simple example, we ignore the effects of interest and inflation, and also make the simplifying assumption that Holly would alienate 100 percent of the upside and downside risk associated with off-site factors. Many homeowners would wish to retain at least some portion of the upside, and, for affordability reasons, would likely keep part of the downside as well.
131. See, for example, Shiller and Weiss, 19 J Real Est Fin & Econ at 33-34 (cited in note 66) (discussing the potential for insurance companies to offer "pass-through futures and options").
132. See also Juerg Syz. Paolo Vanini, and Marco Salvi, Property Derivatives and Index-Linked Mortgages, 36 J Real Est Fin & Econ 23, 24 (2008) (proposing that index-based risk-shifting be built into mortgages).
133. A number of private enterprises have offered products for rearranging homeownership risk. For recent examples, see EquityRock, formerly known as REX & Co. http://www.rexagreement.com (visited Jan 3, 2010) (providing information on agreements that deliver funds in exchange for a share of home equity, which the company plans to resume originating soon); Equity Finance Mortgage, online at http://www.efm.info (visited Nov 13, 2009) (describing shared equity mortgage product offered by Rismark International through Australia's Adelaide Bank); Advanced e-Financial Technologies, Inc. SwapRent. online at http://www.swaprent.com (visited Nov 13, 2009) (offering a product that would let homeowners toggle to and from an "economic renting" mode that offloads upside and downside home price risk).
134. See also notes 57-64 and accompanying text (describing several models for shifting homeownership risk through public or private mechanisms).
135. *4-24 (NBER Working Paper No 13962, Apr 2008), online at http://www.nber.org/papers/w13962. pdf (visited Nov 13, 2009) (discussing history and future prospects of these derivative markets).
136. Encouragement might take the form of subsidies, tax preferences, or regulation. While mandating a particular level of risk shifting seems implausible and even unwise, local governments could require a reduced-risk version of homeownership to be the default option for residents, so that purchasers would have to affirmatively opt into the traditional level of homeownership risk. See Fennell, 102 Nw U L Rev at 1094-95 (cited in note 12) (explaining how a new default package for homeownership could reframe choices and influence decisionmaking).
137. *22-25 (Hamilton Project Discussion Paper No 2008-14, Sept 2008), online at http://www.brookings.edu/papers/2008/09-mortgage- system-barr.aspx (visited Nov 13, 2009) (proposing that lenders be required to offer borrowers a certain set of standard terms as a default matter).
138. Some homebuyers may instead opt for more expensive homes, retaining traditional levels of debt, just as they might undermine the goals of mortgage regulation by increasing their levels of nonmortgage debt. See text accompanying note 54. Tightening credit standards may limit access to debt financing, however.
139. *5 (cited in note 6).
140. As it is, falling prices may discourage rather than encourage sales-as Ian Ayres and Barry Nalebuff put it, buyers do not want to "catch a falling knife." Ian Ayres and Barry Nalebuff, Price-Protect Your Home, Forbes 101 (Sept 16, 2002). Further, getting bank approval for "short sales" is a difficult and lengthy process that can chase away buyers. With option money in hand, a seller should be able to afford to pay off the mortgage in full even if the sales price is less than the amount of the outstanding mortgage.
141. See note 56 and accompanying text.
142. See also Fennell, 102 Nw U L Rev at 1100-03 (cited in note 12) (explaining how offloading homeownership risk might improve homeowner incentives, but noting some qualifications).
143. Technical issues include the appropriate construction and use of indexes, the treatment of inflation, the timing for exercising an option, the structure and timing of payments and payouts, and other details affecting price. For discussion of these issues, see, for example, Shiller and Weiss, 19 J Real Est Fin & Econ at 31-32 (cited in note 66).
144. Shiller, Macro Markets at 96-98, 116-200 (cited in note 12). Regulatory oversight would need to address, among other issues, concerns about consumer mistakes and confusion, investor "capture" of local governance, and discrimination in the pricing or availability of risk-shifting mechanisms.
145. See Fennell, 102 Nw U L Rev at 1095-98, 1104-07, 1115-17 (cited in note 12) (noting these issues and discussing how they might be addressed). The new program's interface with existing regulatory structures, including those governing lending, securities, and insurance, as well as with federal, state, and local taxation mechanisms, would also require attention.
146. See, for example, Andrew Caplin, Noël Cunningham, and Mitchell Engler, Rectifying the Tax Treatment of Shared Appreciation Mortgages, 62 Tax L Rev 505, 514-29 (2009) (explaining how existing tax law impedes the use of shared appreciation mortgages).
147. Fennell, 102 Nw U L Rev at 1007-09 (cited in note 12) (noting issues raised by property tax increases attributable to appreciation after homeowners have alienated upside potential).
148. *24-28 (cited in note 60) (describing regulatory issues encountered in launching a home equity pilot program in New York state).
149. For examples, see notes 58-64 and accompanying text.
150. The underlying financial instruments would be subject to federal regulation, however; thus, the legal treatment of derivatives would affect the availability and structuring of those instruments.
151. In some cases, state authorization may be necessary more as a matter of politics than of law. The State of Illinois, for example, specifically authorized groups of voters within cities with populations of more than one million (a category that includes only Chicago) to create sublocal homeowner equity assurance programs of the type pioneered by Oak Park. See Home Equity Insurance Act, 65 ILCS 95/1-95/14. Even before this legislation was enacted, Chicago, like other Illinois cities, had the power to charter an assurance program like Oak Park's. The legislation enabled neighborhoods within Chicago to create and fund their own assurance programs without interference from the central city government.
152. *6 (cited in note 60).
153. *7-9 (cited in note 60) (detailing shortfalls in programs enacted pursuant to Illinois's statutory scheme).
154. Although the program may make it easier for residents to leave a declining area, moving would remain a disruptive and costly transaction. Perhaps more important, these programs would greatly reduce the risks of staying by providing protection against additional property value decreases; homeowners would no longer have to worry about selling before others do. See, for example, Yarmolinsky, 22 Pub Interest at 109 (cited in note 56).
155. Thomas C. Schelling. A Process of Residential Segregation: Neighborhood Tipping, in Anthony H. Pascal, ed. Racial Discrimination in Economic Life 157, 174 (Lexington 1972). Homeowners also should be reluctant to leave improving areas, since the benefits of that improvement are not portable.
156. While that same consumption interest might also drive NIMBY-like behaviors (rendering them less responsive to risk reduction), it is possible that the latter are driven primarily by risk aversion about home values rather than a belief that the changes in question would actually reduce quality of life. See, for example, Fischel, Homevoter Hypothesis at 9-11 (cited in note 3) (noting that the absence of insurance causes homeowners to worry "about the variance (statistical, not legal) in the outcome" of even those local projects with "benign ⋯ expected effect[s]"). Significantly, with the risk of property value declines out of the picture, homeowners would have to justify their objections in terms of the housing consumption experience rather than rely on the assertion that the change would harm property values. See Yarmolinsky, 22 Pub Interest at 106 (cited in note 56) ("Even where economic concerns are pure rationalization by white racists there is something to be said for calling their bluff.").
157. see also Fennell, 102 Nw U L Rev at 1101 (cited in note 12) (observing that homeowners who were shielded from home value risk could no longer rely on the justification of "preserving property values").
158. The investors holding the risk will have incentives of their own, of course, introducing additional complications. Tracing the full political implications of the shift in risk-bearing arrangements is beyond the scope of this Article, but the analysis one of us has undertaken elsewhere suggests cause for cautious optimism that the rearrangement of risk could produce gains and that the largest concerns could be successfully addressed through policy design. See Fennell, 102 Nw U L Rev at 1098-1109 (cited in note 12).
159. Interestingly, rising property values could present difficulties not only for tenants, but also for homeowners who have alienated their upside appreciation rights under the scheme discussed above; without rights to the increasing equity, rising property taxes would become problematic. See Fennell, 102 Nw U L Rev at 1107-09 (cited in note 12) (discussing this problem and some possible approaches to it). Politically, such difficulties may lead to support for "welcome stranger" property tax assessment rules or other tax caps.
160. See Nordlinger v Hahn, 505 US 1, 6 (1992) (describing "welcome stranger" assessments).
161. For discussions of the significance of security of tenure, see, for example. Florence Wagman Roisman, The Right to Remain: Common Law Protections for Security of Tenure: An Essay in Honor of John Otis Calmore, 86 NC L Rev 817, 820-29 (2008).
162. Richard Arnott, Tenancy Rent Control, 10 Swed Econ Pol Rev 89, 111-12 (2003).
163. Margaret Jane Radin, Residential Rent Control, 15 Phil & Pub Aff 350, 359-63, 368-70 (1986).
164. See Anthony Downs, A Reevaluation of Residential Rent Controls 3 (Urban Land Institute 1996) ("Much evidence indicates that all rent controls, even temperate ones, transfer income from owners to tenants or between various classes of tenants.").
165. William Tucker, Zoning, Rent Control and Affordable Housing 37-41 (Cato Institute 1991) (describing effects of rent control as "war between tenants and landlords").
166. For empirical work on this question, see Choon-Geol Moon and Janet G. Stotsky, The Effect of Rent Control on Housing Quality Change: A Longitudinal Analysis, 101 J Polit Econ 1114, 1143-44 (1993) (studying how housing quality in New York City varied over time depending on the magnitude of the implicit subsidy delivered to tenants through rent control). While Moon and Stotsky found that units with proportionately larger rent control subsidies were less likely to experience quality improvements, their evidence on quality declines was mixed.
167. See id at 1139.
168. See also Downs, A Reevaluation at 12, 55-58 (cited in note 87) (noting that although empirical studies suggest that "stringent" rent controls lead to more deterioration in housing units, the evidence is mixed on whether "temperate" controls have that effect). The picture is complicated by the fact that tenants receiving large subsidies under rent control tend to stay in their units for a long time, and hence have greater incentives to engage in maintenance on their own.
169. See Moon and Stotsky, 101 J Polit Econ at 1125, 1139.
170. *1 (cited in note 13) (noting the tendency of rent control to "induc[e] shortages and higher prices for uncontrolled units"). As Anthony Downs explains, controls that keep rents below market levels suppress price signals that would otherwise induce entry when demand increases; to the extent profits are diminished below "normal" returns, controls send an erroneous signal that induces exit.
171. See Downs, A Reevaluation at 21-26, 45-48 (cited in note 87). Rent control is viewed as a major reason for the decline in private rental markets in Europe.
172. See, for example, Gavin McCrone and Mark Stephens, Housing Policy in Britain and Europe 20 (UCL 1995) (observing, based on data from European countries, that "[t]he size of the private rented sector has been greatly affected by rent control, wherever it has been applied").
173. See also Downs, A Reevaluation at 48 (cited in note 87) ("The experience of the United Kingdom strikingly confirms that stringent rent controls reduce new construction of rental units in the long run.").
174. E. Jay Howenstine, Attacking Housing Costs: Foreign Policies and Strategies 74-81 (Center for Urban Policy Research 1983) (explaining how rent control in a number of countries undermined the profitability of private rental housing, leading to a decline in its economic significance). Where rent control ordinances have avoided supply problems, it may be because their price caps are so relaxed as to have had little binding effect.
175. See Margery A. Turner, Housing Market Impacts of Rent Control: The Washington, D. C. Experience 95-96 (Urban Institute 1990) (discussing evidence indicating that a moderate rent control program in the District of Columbia-one "that explicitly [sought] to maintain the profitability of investment in rental housing"-had a small to nonexistent supply effect); id at 97 (noting that "[i]t is possible that the reason rent control has had no impact on supply is that its impact on price has been negligible" but finding that rent control in Washington, DC suppressed rents by an average of $50 per month).
176. John I. Gilderbloom and Richard P. Appelbaum, Rethinking Rental Housing 134 (Temple 1988) (reviewing studies that suggest that "neither moderate nor strong [as distinguished from restrictive] forms of control have caused a decline in either the quality or supply of the rental stock").
177. id at 220 ("[B]oth the positive and negative economic effects of moderate rent control (its most widespread form) ⋯ [are] limited.").
178. The prevalence of long-time tenants in controlled units is consistent with rent control's effect on newcomers. See Tucker, Zoning at 48 (cited in note 87) (observing in 1991 publication that "[m]ost rent-controlled apartments [in NYC] are occupied by people who have been in continuous residence since 1971-and some have been occupied by the same people (or their friends or relatives) since 1943"). Another concern is that shortages of rental housing will lead landlords to screen based on improper criteria.
179. See Downs, A Reevaluation at 61 (cited in note 87).
180. This lock-in effect follows most clearly if stricter limits on rent increases apply within a given tenancy than between tenancies, as with "vacancy decontrol." See Arnott, 10 Swed Econ Pol Rev at 95-96 (cited in note 86).
181. Downs, A Reevaluation at 58-59 (cited in note 87). But any controls that produce scarcity in rental housing will contribute to lock-in; no tenant wants to give up her place if she will have difficulty finding another.
182. See Downs, A Reevaluation at 59-60 (cited in note 87).
183. See Radin, 15 Phil & Pub Aff at 368-71 (cited in note 86) (discussing a communitarian justification for rent control). Rent control might solve a collective action problem in keeping a community that is highly valued by all of its members from unraveling as a result of households' individual actions to move to cheaper markets. See id at 369. A fully portable tenant benefit, even one that enables households to stay if they wish, would lack this advantage.
184. See text accompanying notes 110-11.
185. See Arnott, 10 Swed Econ Pol Rev at 111 (cited in note 86) (noting that rent control "has a lock-in effect that reduces not only housing mobility but also labor mobility"). Related points have been made in the context of homeownership: owners facing a difficult market tend to become stuck in place, potentially reducing their ability to take advantage of job opportunities elsewhere. For discussion of this issue and how downside home equity protection would remove obstacles to mobility during market downturns, see, for example, Fennell, 102 Nw U L Rev at 1109-10 (cited in note 12); Yarmolinsky, 22 Pub Interest at 107 (cited in note 56).
186. See Downs, A Reevaluation at 59-60 (cited in note 87) ("Rent controls tend to lock in tenants in controlled units regardless of how suitable those units are to the households' real space needs.").
187. This point is analogous to the "front-end load[ing]" associated with forms of rent control that apply only within, and not between, tenancies. See Arnott, 10 Swed Econ Pol Rev at 94 (cited in note 86) (explaining that a rational landlord "will set the initial rent above what he would charge in the absence of controls in an attempt to compensate for the 'loss' (relative to the free market rent) he will make on his unit in the later years of a tenancy").
188. *2 (cited in note 13) (explaining how tenants could "offset rent increases" with gains from their options).
189. See Robert I. Lerman, Promoting Neighborhood Improvement while Protecting Low-Income Families (unpublished presentation, 29th Research Conference, Association for Public Policy Analysis and Management, Nov 2008) (on file with authors) (expanding on the ideas in Lerman and McKernan, cited in note 13, and including options pricing estimates). The idea of such a financial instrument is also raised in O'Flaherty, City Economics at 369 (cited in note 3).
190. In the interest of providing an intuitive illustration of how tenant options could work, this example ignores some important refinements that will be discussed below; accordingly, it should not be viewed as an operational template. More generally, because Lerman and McKernan have provided relatively few details about their proposal, our description may diverge in some respects from the options regime they envision.
191. *10 (cited in note 96) (suggesting that the strike price be set to meet the objective of protecting tenants against "unusually high rent increases" rather than all rent increases). Similarly, rent control programs generally permit annual percentage adjustments of some sort.
192. See Downs, A Reevalualion at 34 (cited in note 87).
193. *2 (cited in note 13). If, for example, Tara's landlord does not keep up the unit in a fashion that reflects the overall improvement in the area but nonetheless raises the rent in accordance with local price trends, Tara may decide to use the money to move to a nicer unit. If her landlord instead opts for a smaller (or no) rental increase, Tara might stay and spend the cash on non-rental needs.
194. Tenants could also conceivably use financial instruments to accept exposure to the risk of downward market fluctuations. Thus. Tara could collect a premium for selling a "put" requiring her to pay out an amount corresponding to the decline in area rents. For example, suppose the area's property values went down in value by 10 percent, reducing the rent demand by Tara's landlord from $1,000 per month to $900 per month. Tara would have to pay the holder of the put $100 per month, or $1,200 per year, leaving her in the same position (from a cash perspective) as if her rent had stayed at $1,000. Builders or landlords with an interest in buffering the risk of falling rents might wish to hedge against that eventuality, and, in theory, tenants could take the other side of those transactions.
195. *5.8 (cited in note 96). Although the sale of the put would allow tenants like Tara to partially offset the cost of obtaining protection against upward rent movements, we assume such arrangements would be too risky to interest many tenants. Tenants would find it hard to make the necessary payments if falling area rents correlated with labor market declines or if their particular units failed to experience a rent decrease.
196. *2 (cited in note 13).
197. *7-8 (cited in note 96).
198. *12 (cited in note 96) (observing that the tenant option proposal "would provide low-income renters with a financial stake in improving their neighborhood").
199. See id ("[T]hese financial instruments would limit or even prevent the downsides of gentrification for low-income residents, help to maintain diversity in neighborhoods, and thereby remove some of the opposition to development."). We do not mean to suggest that a tenant stakeholder program will-or should-make all tenants support every change with a positive expected impact on property values. Both tenants and homeowners might rationally oppose changes that would increase property values but alter the character of the neighborhood in ways that would reduce their desire to remain.
200. See, for example, Eduardo Peñalver, Land Virtues, 94 Cornell L Rev 821, 842-44 (2009). As Lance Freeman makes clear in his book, There Goes the 'Hood, although gentrification often brings desired amenities to an area, such as increased retail and improvements in city services, it also often brings conflict regarding the use of public space, Freeman, There Goes the 'Hood at 137 (cited in note 35), and can evoke "feelings of anger and racially based disrespect," id at 111. Homeowners seek to maximize the sum of their consumption flow and their investment returns, and may rationally forgo some of the latter in favor of more of the former, especially if they plan to stay for a long time.
201. See, for example, Fischel, Homevoter Hypothesis at 150 (cited in note 3) ("If you plan to stay a long time, you are more inclined to suit yourself; if you plan to move soon, you suit the market."). Tenants given the equivalent of an investment stake would be expected to make similar tradeoffs.
202. Research suggests that the typically longer tenure length of homeowners explains part of the correlation between homeownership and socially valuable behaviors and outcomes. See, for example, DiPasquale and Glaeser, 45 J Urban Econ at 356 (cited in note 31) (finding that "the impact of homeownership on our citizenship variables is working substantially through community tenure"). Given this, we might expect increased tenant stability to provide at least some of the benefits that have been traditionally associated with homeownership.
203. *3 (cited in note 13) (explaining that the local government would only make payouts when property values have risen; the rise in property values could increase property tax receipts by enough to fund the required payouts). A locality taking this approach could achieve the same economic result by executing a contractual rent subsidy agreement with selected tenants that made payouts contingent on changes in local rental values. In either case, the informational and risk diversification advantages of an options market would be lost.
204. Alternatively, one might characterize the program as compensating tenants for the harm of gentrification. See Barbara Bezdek, Putting Community Equity in Community Development: Resident Equity Participation in Urban Redevelopment, in Nestor M. Davidson and Robin Paul Malloy, eds, Affordable Housing and Public-Private Partnerships 93, 101-04 (Ashgate 2009) (enumerating harms inflicted by gentrification).
205. *2 (cited in note 13).
206. Most states have constitutional, if not legislative, prohibitions against spending governmental money for anything other than "public purposes." See Lynn A. Baker and Clayton P. Gillette, Local Government Law: Cases and Materials 393 (Foundation 3d ed 2004) ("Virtually every state constitution restricts governmental spending to those activities that serve a 'public purpose.'"). Historically, subsidized housing programs have been attacked as diversions of public money for the "private" gain of the subsidized tenants, although most courts now accept that subsidized housing confers a public benefit.
207. See, for example, Martin v North Carolina Housing Corp, 175 SE2d 665, 672-77 (NC 1970) (finding that an act establishing a public housing corporation to provide housing assistance to low-income families served a public purpose). However, the new forms of subsidies discussed in this Article-particularly the multiyear cash-out option-may reinvigorate this issue. See text accompanying notes 115-16.
208. *3 (cited in note 13) (suggesting that "[s]ome limitations might be placed on those assets purchased with government subsidies").
209. Absent this ability, landlords might treat their tenants as a captive audience, skimping on maintenance and other services, essentially overcharging those tenants (and the subsidizing government) for the accommodations provided.
210. Though sympathetic scholars such as Bezdek, Putting Community Equity in Community Development at 101-04 (cited in note 106), assume that tenants would want to stay in gentrifying areas if they could afford to, and recent studies suggest that most in fact stay, see Freeman and Braconi, 70 J Am Planning Assoc at 48 (cited in note 34), some might prefer to move. Even longtime residents may feel out of place as their neighborhood changes around them. Their friends may die or leave, new stores catering to a different clientele may replace the establishments they used to patronize, and community organizations may develop a different focus.
211. See Freeman, There Goes the 'Hood at 83 (cited in note 35) (citing literature decrying changes brought by gentrification "loathed by long-term residents").
212. For discussion of the potential advantages of income mixing, see, for example, Alex F. Schwartz, Housing Policy in the United States: An Introduction 263 (Routledge 2006).
213. Alastair Smith, Mixed-Income Housing Developments: Promise and Reality 1 (Joint Center for Housing Studies of Harvard University, Oct 2002), online at http://www.jchs.harvard.edu/publications/W0210-Smith.pdf (visited Nov 8, 2009).
214. Harry J. Wexler, HOPE VI: Market Means/Public Ends-The Goals, Strategies, and Midterm Lessons of HUD'S Urban Revitalization Demonstration Program, 10 J Affordable Hous & Comm Dev L 195, 204-06 (2001).
215. But see Freeman, There Goes the 'Hood at 204 (cited in note 35) ("[T]here seems to be little reason to expect gentrification to significantly affect the class trajectories of residents indigenous to gentrifying neighborhoods-at least in the short run.").
216. Perhaps the most infamous example of resident displacement in the name of job preservation was Detroit's use of eminent domain to displace the residents of Poletown in order to facilitate the construction of an automobile assembly plant. See Poletown Neighborhood Council v City of Detroit, 304 NW2d 455, 457-59 (Mich 1981), overruled by County of Wayne v Hathcock, 684 NW2d 765 (Mich 2004).
217. We do not mean to suggest that tenant options would always make eminent domain unnecessary, nor that voluntary moves prompted by community changes are necessarily free from negative normative implications. Nonetheless, eminent domain is often thought to constitute a particularly damaging form of displacement.
218. *2 (cited in note 13) (discussing plans guaranteeing tenants ten years of expected future benefits, regardless of whether they move).
219. For example, if the call option generates cash representing the value of ten years of rental increases, one tenant may move out at the end of year one, entitled to receive a further nine years of payments, while another tenant moves in at the start of year two, moving out at the end of the year and becoming entitled to a further nine years of payment; a third may take up residence in year three and move out in year four, and so on. Thus, multiple tenants could become entitled to payments for each year's increase in rental costs with respect to a single apartment. And, of course, former tenants may be entitled to collect similar payments under similar plans offered in their new places of residence.
220. *19 (cited in note 63) (examining the tradeoff between maintaining permanent affordability of a housing unit and effectuating housing choices of current occupants).
221. See Richard Briffault, The Local Government Boundary Problem in Metropolitan Areas, 48 Stan L Rev 1115, 1136-37 (1996) (describing how "affluent localities can [ ] use their regulatory authority to maintain their preferred fiscal position").
222. For discussion of the contiguity requirement, see Clayton P. Gillette, Expropriation and Institutional Design in State and Local Government Law, 80 Va L Rev 625, 672-86 (1994). While the contiguity requirement can prevent cities from annexing far-flung wealthy communities while ignoring intermediate poor ones, it cannot prevent communities from refraining from all annexation in order to avoid the annexation of poor areas. Remedying that situation requires changes in state annexation rules. Scholars advocating such changes have come up with different suggestions based on differing assumptions about the location of needy individuals.
223. Compare Michelle Wilde Anderson, Cities Inside Out: Race, Poverty, and Exclusion at the Urban Fringe, 55 UCLA L Rev 1095, 1159 (2008) (advocating "state legal reforms that increase territorial outsiders' ability to initiate annexation").
224. Laurie Reynolds, Rethinking Municipal Annexation Powers, 24 Urban Lawyer 247, 253-54 (1992) (advocating allowing municipalities greater power to annex nonresidents on "the fringe").
225. There is an ongoing scholarly debate over whether the California Supreme Court's decision in Serrano v Priest, 487 P2d 1241 (Cal 1971), striking down California's reliance on local property taxes for financing public schools, id at 1244, was responsible for the later success of Proposition 13, a constitutional amendment enacted by referendum that rolled back the property tax assessments of some residents and strictly limited future increases in property tax assessments and rates. The leading proponent for causality, William Fischel, argued that by delinking local taxes from local service provision, Serrano turned local taxes into a "deadweight loss" for most voters, making them more likely to vote for Proposition 13.
226. See, for example, William A. Fischel, Did Serrano Cause Proposition 13?, 42 Natl Tax J 465, 469 (1989). Others have challenged the empirical basis for Fischel's claim.
227. See Kirk Stark and Jonathan Zasloff, Tiebout and Tax Revolts: Did Serrano Really Cause Proposition 13?, 50 UCLA L Rev 801, 853-54 (2003).
228. See generally Isaac Martin, Does School Finance Litigation Cause Taxpayer Revolt? Serrano and Proposition 13, 40 Law & Soc Rev 525 (2006). Fischel stands by his original position.
229. See William A. Fischel, Did John Serrano Vote for Proposition 13? A Reply to Stark and Zasloff's "Tiebout and Tax Revolts: Did Serrano Really Cause Proposition 13?," 51 UCLA L Rev 887, 888 (2004).
230. *13 (Dartmouth College Working Paper, Feb 2009), online at http://www.dartmouth.edu/~wfischel/Papers/Martin%20comment%20feb09.pdf (visited Feb 4. 2010). Other state plans that have reallocated local property tax revenues to equalize school funding have encountered serious political resistance.
231. See, for example, Laurie Reynolds, Uniformity of Taxation and the Preservation of Local Control in School Finance Reform, 40 UC Davis L Rev 1835, 1883-84 (2007) (stating that the Texas and Vermont experiences with "recapture" mechanisms "leave no doubt about the political volatility of this school funding system").
232. Maurice Dyson, The Death of Robin Hood? Proposals for Overhauling Public School Finance, 11 Georgetown J Poverty L & Pol 1, 4-18 (2004) (detailing challenges to the Texas system).
233. For some views on how regional or metropolitan-area governance might be approached, see Myron Orfield, Metropolitics: A Regional Agenda for Community and Stability (Brookings 1997).
234. Scott A. Bollens, Concentrated Poverty and Metropolitan Equity Strategies, 8 Stan L & Pol Rev 11, 14-15 (1997).
235. Briffault, 48 Stan L Rev at 1164-68 (cited in note 118). Some examples of regional governance exist.
236. See Baker and Gillette, Local Government Law at 725-31 (cited in note 108) (describing existing regional governments and discussing the issues that gave rise to them). However, most believe the political support necessary for the establishment of comprehensive forms of metropolitan government is absent.
237. See, for example, Amnon Lehavi, Intergovernmental Liability Rules, 92 Va L Rev 929, 981 (2006) (citing political obstacles to regionalization).
238. Briffault, 48 Stan L Rev at 1171 (cited in note 118) (finding "little reason to be optimistic about the prospects for metropolitan governance" given that "[h]ostility to metropolitan government is intertwined with a commitment to local autonomy that is deeply rooted in both law and politics").
239. Anthony Downs, New Visions for Metropolitan America 170 (Brookings 1994) ("Metropolitan government has almost no political support.").
240. See Clayton P. Gillette, The Conditions of Interlocal Cooperation, 21 J L & Polit 365, 365 (2005) (listing arguments against regionalism).
241. Richard Briffault, Localism and Regionalism, 48 Buff L Rev 1, 15-17 (2000) (stating arguments of "advocates of [ ] decentralization").
242. Robert P. Inman and Daniel L. Rubinfeld, Rethinking Federalism, 11 J Econ Persp 43, 47 (Fall 1997) (identifying studies "offer[ing] empirical support for the proposition that competitive local governments do provide citizens the public services they want at the lowest cost").
243. Briffault, 48 Stan L Rev at 1124 (cited in note 118) (noting that in Tiebout's model, a "multiplicity of localities" in a given area "enhance[es] the likelihood that one locality will approximate the mobile 'consumer-voter's' preferences").
244. Fischel suggests that municipalities have disincentives to engage in "beggar thy neighbor" tactics, arguing that neighboring jurisdictions "are locked into a web of mutually beneficial exchanges at both the political and the personal levels." Fischel, Homevoter Hypothesis at 184 (cited in note 3).
245. But see Lehavi, 92 Va L Rev at 942-46 (cited in note 121) (discussing Fischel's account and suggesting he "may have been overly optimistic"); Briffault, 48 Stan L Rev at 1149 (cited in note 118) (describing how local decisions can create "a 'tragedy' of the regional 'commons'").
246. See, for example, Lehavi, 92 Va L Rev at 943-44 (cited in note 121) (observing prevalence of uncoordinated local land use policies that produce externalities); Gillette, 21 J L & Polit at 373-82 (cited in note 122) (describing "contracting cost" barriers to interlocal cooperation); Briffault, 48 Stan L Rev at 1147 (cited in note 118) (finding agreement-based solutions unpromising due to "the inability of metropolitan area localities to come to grips with the regional prisoners' dilemma caused by local land use decision making, local fiscal autonomy, and local responsibility for the costs of local public services").
247. See Briffault, 48 Stan L Rev at 1165-66 (cited in note 118) (advocating a "rule of subsidiarity": "only those functions necessary for metropolitan governance should be shifted to regional institutions").
248. For discussions of possible ways cross-boundary voting might be structured, see, tor example, Ford, 107 Harv L Rev at 1909 (cited in note 5); Jerry Frug, Decentering Decentralization, 60 U Chi L Rev 253, 329-34 (1993).
249. See also Aaron J. Saiger, Local Government without Tiebout, 41 Urban Lawyer 93, 120-37 (2009) (proposing a redistricting scheme for local governance that would employ periodically shifting boundaries).
250. See Lehavi, 92 Va L Rev at 988 (cited in note 121) (explaining how a system of liability rules might address conflicts among jurisdictions).
251. See generally Henry E. Smith, Semicommon Property Rights and Scattering in the Open Fields, 29 J Legal Stud 131 (2000).
252. See id at 132.
253. See id at 135.
254. Robert C. Ellickson, Property in Land, 102 Yale L J 1315, 1388-90 & fig 3 (1993) (describing and depicting this arrangement).
255. See Smith, 29 J Legal Stud at 144-54 (cited in note 128).