What's a 'Libertarian Solution' to the Foreclosure Mess?

There's a sort of fair question highlighted at Balloon Juice--why aren't libertarians proposing solutions for the foreclosure crisis?  There are serious paperwork issues, which banks seem to have tried to solve by throwing together some highly suspect legal documents.  As Mistermix says, "Since the basis of libertarian philosophy is property rights, I would have expected a little more outrage from places like Reason about robo-signing".  ED Kain adds "In any case, I say mistermix's critique is fair because it is - libertarians are not proposing meaningful solutions to the foreclosure problem as far as I can tell."

I can't speak for Reason (though, full disclosure, my husband works there), but I can tell you why I haven't written more about it: it's an insanely complicated legal issue that would require a crash course in real estate law to understand.  Do you understand what the difference between "mortgage chain of title" and "note chain of title" issues?  I don't, yet Adam Levitin tells me it is important for understanding the recent Massachusetts case.  In order to have anything to say at all, I would have to spend days reporting this, and from what I've already read, I know that this would leave me just barely qualified to describe the issues involved, not to propose a solution.  The related areas of law that I do report on, like bankruptcy, have left me with a healthy respect for how complicated it all is.

Now, it would be worth trying to acquire expertise if I felt that there was some sort of unique Megan McArdle perspective that I could add.  But overall, my sense is that the issues implicated are quite technical; they do not involve broad philosophical questions, but narrow legal ones about how property rights are handled when the property is transferred. It's not clear to me that this is an issue in which people who aren't already fairly deep experts need to get involved, other than by providing general support for doing something.  But I don't think that's really a controversial proposition.

My experience in reporting on bankruptcy has made me fairly confident that the American system errs towards debtors--even when the law doesn't, the judges do (For example, I am told by members of the bankruptcy bar that bankruptcy judges have essentially read some of the more onerous limitations of the 2005 reform, like the re-filing limits, out of the law).  My impression is that this is now manifesting in increased scrutiny of these mortgages.

So my solutions, such as they are, aren't particularly libertarian, or specific:

1)  Judges should very carefully scrutinize foreclosures to ensure that the banks have a legitimate right to foreclose. (My sense is that they are doing this already; in cases where they are not, and this is a widespread problem, they should be specifically directed to do so by the legislature, perhaps with clarifications as to what constitutes adequate chain-of-title).

2)  Legislators should set up some sort of system so that banks with a broken chain of paperwork--a note that, for example, was improperly transferred into or out of a Lehman trust--can eventually reconstruct the paperwork in a legitimate process.  Banks without adequate paperwork should of course not be allowed to foreclose without it, but over the long run, it is not good for society to have a vast reservoir of houses out there which can neither be foreclosed upon, nor sold.

3)  If a judge feels that the bank's behavior has been egregious, let them use their power to sanction the banks in question.  My understanding is that they have quite a lot of scope to do so.

But this is not a solution; it is a directive to the legislatures and lawyers to find one.  And I don't think it will be fast.  My reading on past financial crises, at least in the US, indicates that when the whole system comes crashing down, the legal systems surrounding debt and property rights always turn out to be inadequate to the new problems.  They are partially repaired by changing the law, but a lot of the issues only end up getting resolved through litigation, as is already happening with the foreclosure mess.  That's slow and painful, but unfortunately also necessary; it's how our system clarifies what the law means.

Since I'm not a lawyer, I can't be any more specific than that.  So I'm not sure what more blogging about it would add to the public discourse.  Folks like Adam Levitin seem to be doing a fine job of analyzing the problem and recommending solutions; I'm content to leave it up to them.

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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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