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Modern Waste Law & Residential Mortgages

From the time of the subprime mortgage collapse, lenders began in earnest in several jurisdictions to sue borrowers under a new theory of liability: tort claims for waste. Today, these claims continue to rise in frequency and to expand to new jurisdictions. Lender waste claims provide a “work around” for state mortgage laws that prohibit personal deficiency judgments after foreclosure and are potentially non-dischargeable in bankruptcy. While a recent wave of scholarship has addressed the problems of how the bankruptcy system handles mortgages, scholars have not yet explored the use of waste actions by lenders and how waste judgments intersect with bankruptcy and foreclosure. 
 
Using new research on the evolution of waste law, this Article traces the changes that allowed lenders—who at the common law had no standing — to bring waste actions and how the doctrine has evolved to make those actions more available and more lucrative for lenders. Drawing on that history, this Article argues that in the context of bankruptcy law, waste judgments create multiple problems, including frustrating the general purpose of a fresh start, amplifying concerns about peonage—particularly given the history of discriminatory subprime lending — and further obfuscating an existing circuit split on the rules for when a tort claim can be discharged. 
 
For property law, lender waste claims create additional problems. The traditional measure of damages in waste law (market value change) works poorly in the context of underwater mortgages. The traditional split of waste claims into permissive and voluntary in intent aligns problematically with bankruptcy’s system for determining when a claim may be discharged and when it will survive post bankruptcy. Overall, simply transferring standard waste doctrines into the lender context defeats a number of important protections of both bankruptcy and mortgage law and is inconsistent with modern property theory. 
 
After examining these challenges in detail, this Article addresses whether lenders should have standing and proposes five adjustments to traditional waste doctrine in the context of residential mortgages. These proposals suggest how waste law should properly evolve to protect both lenders and borrowers.