Foreclosure by Arbitration?

Abstract

Despite the potential advantages that foreclosure-by-arbitration clauses could offer, such clauses have not become customary in mortgage transactions. This article explores why this is so and whether there are any structural legal barriers that would prevent a mortgagee from privatizing the foreclosure process through arbitration. Parts I and II provide the appropriate background. Part I addresses the judicial/nonjudicial foreclosure divide in American real estate law, explaining why the potential utility of arbitration varies depending upon what foreclosure methods a state has legally authorized. Part II provides similar background on arbitration-the process characteristics of arbitration as compared to public adjudication, the process values sought to be advanced by the use of arbitration, and how these process characteristics and values are implicated in the context of mortgage foreclosure. Part III then addresses whether there are any legal barriers to the use of arbitration in lieu of judicial foreclosure and concludes that no such barriers exist.

This article focuses primarily on the descriptive question (i.e., can a mortgage lender privatize the foreclosure process through arbitration?). There remain substantial differences of opinion about whether mandatory pre-dispute arbitration is just, particularly in the consumer context, and efforts continue in Congress to amend the FAA to prohibit mandatory predispute arbitration in consumer disputes (which would include enforcement of residential mortgages).' While this article is not intended to resolve the broader normative question (i.e., should a mortgage lender be able to privatize the foreclosure process through arbitration?), Part IV does offer some concluding thoughts about foreclosure-by-arbitration in the context of residential mortgages.