The following is a summary of Cori Harvey's article in the Missouri Law Review entitled “We Buy Houses”: Market Heroes or Criminals. The article discusses residential pre-foreclosure investing in the specific context of “We Buy Houses” transactions and other residential sale/leaseback/buyback (RSLB) transactions from the perspective of investors.
The article calls for a retreat from the position that RSLB transactions are “foreclosure rescue scams,” making both descriptive and prescriptive claims. The descriptive claims are as follows: the transaction is a beneficial one and has valid, non-fraud raisons d’etre, and the level of persecution of this transaction is escalating due to a combination of social, political, and economic factors.
The prescriptive claims are as follows: criminal regulation creates more harm than it cures by eroding the institution of contracting and by exacerbating the very market failure that gives rise to the transaction, and that where there are problems with the transaction, there are better alternatives to criminal regulation.
The article is split into several parts. Part I explains the transaction and introduces the homeowner and investor, examines case law that demonstrates the escalation of RSLB charges, and spells out the benefits to homeowners in these transactions. Part II explores the means and justifications for criminal regulation of this transaction. Part III outlines several problems with criminal regulation of ordinary economic behaviors. Part IV suggests several alternatives to criminal regulation. The article concludes with Part V, which details the case of Timothy Barnett, the first-ever white-collar defendant sentenced to a potential life sentence under a three-strikes law in California.
The article is interesting in that it discusses white-collar criminals receiving “draconian” sentences for actions that may or may not be illegal. On one hand, I agree with the author that RSLB transactions can serve a legitimate purpose by giving homeowners an alternative to foreclosure. However, if an investor is knowingly misleading homeowners into making RSLB transactions when the investor knows the homeowner will be unable to make payments, the investor shouldn’t be able to escape prosecution.
- Cole Cameron