An announced moratorium on mortgage foreclosures in the City of Philadelphia is of questionable necessity and legality. A prolonged mortgage foreclosure moratorium would inevitably deter lenders from extending credit to City residents and thereby lead to higher mortgage interest rates and restrictions on access to credit for all of the City's residents.

Last week, Philadelphia Sheriff John Green announced that he was postponing April foreclosure sales, a move that he said would give his office more time "to identify and help distressed homeowners." Sheriff Green's announcement came just minutes after the Philadelphia City Council passed a non-binding resolution calling on the Sheriff and the President Judge of the Court of Common Pleas to impose a moratorium on residential foreclosure sales in the City. While proponents of a moratorium use "crisis" rhetoric to support the idea, 2007 mortgage data for the Philadelphia region show that the situation in Philadelphia is substantially better than elsewhere in the country and substantially better than it was the previous year. Extending the moratorium on foreclosures would probably restrict the availability and increase the cost of mortgage credit for City residents. The proposed moratorium also raises myriad legal issues. In short, the wisdom and legality of a moratorium are extremely doubtful.

Although this moratorium has been justified as a necessary step to protect the City's homeowners, at present it applies to all kinds of property, including non-owner-occupied and commercial real estate. Sheriff Green plans to ask President Judge C. Darnell Jones II of the Court of Common Pleas for an extension of the moratorium, which would halt the next scheduled sale in May and likely beyond. Such moratoria have been imposed in Philadelphia in 1983 and 2004.

According to Sheriff Green, the moratorium is necessary because Philadelphia homeowners are facing a "devastating mortgage foreclosure crisis." Similarly, the City Council's resolution asserted that the current foreclosure "crisis" is among the worst the City has ever seen. Yet neither the Sheriff nor City Council has provided any statistical evidence supporting a foreclosure crisis in Philadelphia. In fact, 360 commercial and residential properties were scheduled for sale in April, as opposed to 1,120 properties, more than three times this month's number, scheduled for sale for a month in 2004 just before the latest prior moratorium. And the RealtyTrac Metro Foreclosure Market Report puts the 2007 U.S. nationwide foreclosure rate at 1.033%, up 79% from 2006. By contrast, the 2007 rate for Philadelphia was 0.492%, less than half the national rate, and down 32% from 2006. Of 100 metropolitan areas included in the RealtyTrac survey, Philadelphia had the 79th highest foreclosure rate, putting it in the quartile with the lowest foreclosure rate.

Beyond the question of whether a moratorium is economically justified, it is also of questionable legality. As a threshold matter, the City Council and the Sheriff have failed to articulate a legal basis for unilateral action by the Sheriff and/or the Court of Common Pleas. Neither the Sheriff nor the President Judge is charged with making what is essentially a legislative judgment. Additionally, the Pennsylvania Mortgage Bankers and Brokers and Consumer Equity Protection Act speaks directly to this issue and expressly prohibits the City from "enacting and enforcing ordinances, resolutions and regulations pertaining to the financial or lending activities of [mortgage lenders]." Finally, the Contracts, Takings, Due Process and Supremacy Clauses of the U.S. Constitution also create potential problems for a moratorium plan. Although the Supreme Court upheld mortgage moratoria during the Great Depression, it emphasized that those moratoria granted reasonable and appropriate relief during an economic emergency in that they were limited in time and provided compensation to the affected lenders. Whatever the gravity of the current situation, it does not compare to the Great Depression. Moreover, the threatened Philadelphia moratorium has no time limit and will certainly involve no compensation to mortgagees for the abridgement of their contract rights.

Ballard Spahr's Consumer Financial Services Practice Group and Real Estate Department can provide information on the moratorium. For more information or advice on legal issues related to this and other consumer financial services issues, please contact any of the following Ballard Spahr attorneys:

Consumer Financial Services Group

Alan Kaplinsky, Chair
215.864.8544 or

Jeremy Rosenblum, Vice-Chair
215.864.8505 or

John Culhane
215.864.8535 or

Mark Furletti
215.864.8138 or

Real Estate Department

Michael Sklaroff, Chair
215.864.8700 or

Phillip Korb
215.864.8709 or

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