Judicial Decision Making in Times of FINANCIAL CRISES
Sommer, Udi, Li, Quan, Judicature
State Supreme Courts and Mortgage Moratorium Laws in the Great Depression
Ever since the bankruptcy of Lehman Brothers on September 15, 2008, which is widely viewed as a watershed event in the current financial crisis, the U.S. housing market still faces considerable destabilizing pressures. Foreclosure filings reached a historical high in July 2009, registering a year-over-year increase of more than thirty percent. Most recently, sales of foreclosed homes accounted for twenty-five percent of all residential sales in the third quarter of 2010.' It appears that the scope and severity of the current crisis in housing could only be matched by what happened during the Great Depression when nearly 50 percent of urban homeowners became delinquent by January 1934.2
In the current recession, governments at various levels have rushed to prevent the worsening of the housing market. The measures adopted vary. Many states put in place temporary mortgage moratoria through state laws. Likewise, the Housing and Economic Recovery Act of 2008 increased loan guarantees of the Federal Housing Administration by $300 billion in order to encourage lenders to refinance delinquent home mortgages.3 In this article, we focus on one branch of government, the judiciary, and study how it responds to housing crises by examining the Casé of the 1930s and 1940s. The financial environments for foreclosures were different in the 1930s and today. Yet, a closer examination of the role of courts in the housing crisis during the Great Depression should improve our understanding of the operation of courts in times of crisis in general4 and particularly in times of financial crisis.5 In addition, by focusing on state Supreme Court decision-making, this article enhances our understanding of how state courts operate within their unique institutional, structural and legal settings, and specifically the role those courts assume during Crises. Finally, while recognizing certain differences between the 1930s and the current crisis, the findings of our study offer some valuable historical lessons.
Foreclosures and the Judiciary
The role of state judiciary in preventing foreclosures was enhanced during the 1930s.9 By foreclosure, we refer to both residential and commercial foreclosures. Depending on the amount of judicial discretion granted by their state legislature, state courts' dealings with the foreclosure procedure varied. In states where mortgage relief legislation was adopted, the courts in some instances were empowered to intervene on behalf of debtors in at least two major ways. First, creditors were prevented from obtaining tide to a property for a specified period of time, which was usually set by the courts and at the courts' discretion. Secondly, the courts could discretionarily set a rental price that was usually below the free market rental for debtors to pay during a grace period.7 In states where legislative inertia prevented the adoption of relief measures, state courts sometimes took the initiative and responded directly to the demand of relief. In other instances when state courts refused to offer any special relief for debtors, it was the state legislature that managed to use legislative solutions to help mortgagors. Notably, however, when states tried to renew their temporary mortgage moratorium laws, the Courts oftentimes declared them unconstitutional .8
While the literature revealsan interesting picture of the role of the judiciary in the housing market during the Great Depression, it leaves some important questions unanswered. Following the Supreme Court's landmark decision in Home Building 6f Loan Assn. v. Blatsdell,9 legal scholars conducted lengthy debates concerning the jurisprudence of mortgage moratorium laws.10 These laws, as they were passed by the states in the early 1930s, faced at least two potential constitutional challenges.11 First, these statutes might violate the Fourteenth Amendment of the Federal Constitution and the corresponding sections of the state Constitutions, which protected creditors' property rights under due process of law. …