The Finger in the Dike: State and Local Laws Combat the Foreclosure Tide

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The foreclosure crisis that began in 2007 has forced state and local governments to develop a first response capacity to meet a national crisis. States seeking to control foreclosures have always faced certain limitations in enacting laws that limit or impair contract rights. These limits arise primarily under the contracts clause of the United States constitution. other provisions of the U.S. Constitution, such as the Takings Clause, as well as terms of state constitutions may set additional limits. This article will examine the degree to which various constitutional provisions may limit the ability of states to control mortgage foreclosures. overall, my conclusion is that under their police power, states have broad authority to limit enforcement of mortgage obligations. This article will trace the history of state laws that have sought to alleviate the harsh effect of foreclosures in the past, beginning with the significant controversies that arose over state foreclosure laws during the Great depression of the 1930s. Later sections will review trends in recent state legislation. during the current crisis, state and local efforts have focused on foreclosure mediation and conference laws, as well as laws to control servicer conduct, so as to encourage a full consideration of loss mitigation options. overall, I conclude that recent state laws enacted in response to the foreclosure crisis have been relatively mild and have not approached the true limits of states' authority to control mortgage foreclosures.


During a period of eighteen months in 1933 and 1934, twenty-seven states enacted statutes designed to mitigate the effects of the mortgage foreclosure epidemic that was sweeping the country. (1) In February and March of 1933, Iowa and Minnesota passed the first such laws shortly after several thousand farmers stormed the opening legislative sessions in each state, disrupted proceedings, and demanded immediate foreclosure relief. (2) Before the enactment of the Minnesota law, the state's governor threatened to impose martial law over the deteriorating foreclosure climate and issued an executive order to sheriffs statewide to cease conducting foreclosure sales and evictions. (3) One commentator who was involved in drafting legislation at the Minnesota capitol at the time described the climate in the legislature as a "flood of bills" poured in:

   It was proposed, for example: that the courts be closed to all
   mortgage foreclosure proceedings for two years; that the power to
   foreclose by advertisement be abolished; that sheriffs be given the
   power to postpone foreclosure sales at their discretion; that the
   courts be given the power to continue all foreclosure proceedings
   for two years upon such terms as should appear to them to be
   appropriate; that the period of redemption be extended arbitrarily
   one year, or two; and that henceforth there should be no personal
   liability upon any note or debt secured by a mortgage after the
   mortgage had been foreclosed. (4)

During 1933 and 1934 many states enacted statutes that actually achieved most of these objectives. State legislatures drafted these laws with care in hopes of surviving constitutional challenges. The statutes authorized stays of foreclosure proceedings and extensions of post-sale redemption periods, often lasting for several years. Borrowers were given the power to turn non-judicial foreclosures into judicial foreclosures. State legislation provided tools for courts to restrict the harshness of deficiency judgments. (5) Some prominent examples of these laws will be discussed below.

A. Moratorium/Stay of Proceedings in Depression-Era Legislation

Moratorium laws enacted during the thirties applied to both nonjudicial and judicial foreclosures. Yet, for the most part, these statutes were drafted carefully to incorporate judicial supervision over any stay of foreclosure. …