The Real Scandal of the Foreclosure Mess

The story on the foreclosure mess has become a bit overblown in some tellings.  It's clear that banks have been taking some shortcuts in preparing their foreclosure documents.  The banks are obviously overwhelmed with the volume of foreclosures, and the (apparently) many instances in which sloppy securitization has resulted in lost paper trails, obscuring who, exactly has a right to foreclose.  Rather than seeking legislative or judicial clarification, they've resorted to dubious practices that seem (to my non-legally-trained eye) illegal.

That is bad.  But as Arnold Kling points out, there's little evidence that this has resulted in improper foreclosures:  evicting people who've paid, or who never had a mortgage with your company.  Anectdotally, these things do seem to have happened, but there's no evidence that they're frequent, or that they are connected to the procedural irregularities that we're now discovering with foreclosure documents.

Arnold says that the real scandal is our antiquated title system:

The real scandal is that the process of recording property title is so antiquated, and there are so many interest groups that resist modernizing it. The MERS mortgage database shows what a modern system could look like. But all of the counties that charge fees for title recording, the title "insurance" companies that shake down home buyers to buy "protection" from getting sued to prove that they own their property--these interest groups want to keep the title recording system as expensive and unreliable as possible.

. . . and that it's taking so long to get people out of homes they can't afford.

On the latter point, I can't say I agree.  I don't even think the banks want to get people out faster, because they can't sell the damn houses anyway.  And while yes, many of the people who are now being foreclosed upon got themselves into this mess with a combination of stupidity and greed, who's it hurting if they get to live rent free for a few more months while their credit report is being trashed?  A lot of other people being foreclosed on are normal folks who bought a home in an overvalued market, and then lost their jobs.  In places like Michigan, Las Vegas, and California, it is entirely possible to have seen a prudent 20% downpayment wiped out, leaving you underwater.  To be fair, that's in large part because so many of your neighbors took out crazy loans . . . but I'm still glad that those people are getting a rent-free hiatus to get their shattered fiscal lives together.

On the former point, however, I think he is 100% correct.  We are witnessing the confluence of two problems:  our antiquated titling system, and a massive move to securitization without adequate systems for tracking the chain of custody on these mortgages.  The result is that it is now unclear who has title to these houses.

I know some of my readers will be tempted to cheer at the thought of the little guy getting one over on the bank, but what about the people who bought foreclosed houses?  They just bought into a whole world of legal problems.  

As Hernando de Soto has chronicled, good land titling is important. It is also emergent.  When there are changes in the marketplace, we need new legal mechanisms for dealing with any resulting irregularities.  I don't know if the the bill that Obama just pocket vetoed would have done more good than harm.  But I sure hope he isn't planning to just let this mess continue for fear of being seen to do anything that "helps the banks"--or in hopes that some lucky voters will get to default and keep the house.  
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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