Guess what? You'll never believe this. It seems that everything is too hard and nobody knows anything ever. Join us once again as we ask the eternal question: Is Megan McArdle Stupid Or Evil?
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.
That's an interesting way of putting it. Here's another:
At the 2000 National Consumer Law Conference in Broomfield, Colorado, Nye Lavalle released two white papers and reports he authored. The reports released were titled Predatory Grizzly "Bear" Attacks Innocent, Elderly, Poor, Minorities, Disabled & Disadvantaged and 21st Century Loan Sharks."
In a follow-up report in 2008, titled "Sue First, Ask Questions Later," Lavalle detailed the wide-scale practice of robo-signing in the mortgage servicing industry. On page 1 of the report Lavalle states "one of the many predatory servicing practices developed was the use of known false, fraudulent, and forged affidavits, assignments, and satisfactions of mortgages." In this report, Lavalle identifies a number of non-conformances in the handling of mortgages, power of attorneys, affidavits, and satisfaction of liens in public records across the United States. Among other problems with these records, Lavalle states that he found evidence of documents being forged by using "squiggle marks" that are not the marks or signatures of the officer that is authorized to be the signatory on the document in question. In addition, Lavalle finds that "initials only" marks were used so that anyone can sign an officer's signature. Lavalle also states that he found significant variations in the marks for individuals that suggest multiple signers. Also noteworthy was the revelation that a named officer of a bank or lender was found to have signed documents which would imply that the officer was in many different cities across the United States at once.
A Washington Post article about the robo-signing foreclosure crisis on October 7, 2010, concluded with Lavalle's warning to the industry when the Post wrote "several years ago (2003), on a message board still active on the MERS Web site, one participant (Lavalle) accused the company of participating in fraud and concealing the transfer of loans from public scrutiny." "The company's president and chief executive, R.K. Arnold, responded by insisting that MERS actually increased the transparency of the mortgage system and reduced the cost of homeownership by making the industry more efficient." "We're not perfect," Arnold wrote, "but there's nothing sinister about who we are and what we do."
Beginning in 2009, the allegations of robo-signing by Lavalle, Epstein and Redman were proven by local Palm Beach Attorney, Tom Ice of Ice Legal, who proved up the wide-scale practice of robo-signing in depositions taken of GMAC's Jeffrey Stephan and other robo-signers. News outlets have reported that on September 14, 2010, Jeffrey Stephan testified that he had signed affidavits which he hadn't actually reviewed on behalf of Ally Financial Inc. This revelation led to increased scrutiny of foreclosure documentation. The practice was apparently common practice in the mortgage industry, and was given the term Robo-signing. In the weeks following the robo-signing revelation other large banks have come under fire for employing robo-signers as well, including JPMorgan Chase and Bank of America.
In their haste to make money by vacuuming up mortgages to resell, the lenders and MERS broke the laws requiring a clear title trail from each owner to each seller. To cover up their crimes the lenders hired people to forge a title trail, which McArdle calls "throwing together suspect documents" to downplay the frauds. Which is clearly Evil, and what she has been doing for months.
October 20, 2010:
I think it's understandable that a lot of the reaction to the foreclosure mess has focused on the theater--law firms hiring incompetents! robo-signing!--rather than the actual impact. The thing is ludicrous, though it was also probably predictible that something alone these lines would be uncovered. (Not that I did predict it, mind you; I just mean that in hindsight, it seems inevitable) The mass outsourcing of loan service to specialist firms is relatively recent, and those firms have never gone through a large wave of foreclosures, which means that what they're specialized for is simply collecting checks and mailing them onward. Meanwhile, the sheer volume of loans that was pouring through the securitization system seems to have overwhelmed the private companies, the state registry systems, and the regulators; a lot of paperwork has been lost.
So it's not exactly an unexpected shock to find that a bunch of companies decided that the easiest way to handle these little gaps in the paperwork was to, um, commit notary fraud. I'm not condoning it, mind you; these firms will richly deserve whatever sanctions are ultimately imposed. But I can't say it has caused me to leap out of my chair in surprise and horror and shout "Say it ain't so, Joe!"
I find it odd, however, that so many people seem to be implicitly treating this as something horrible that the servicers have done primarily to those being foreclosed on. Yet no one's arguing that the outcome would have been different if the paperwork had been in order. It might have taken longer, which would allow people extra time in their homes--but that's what's happening now. There's some implication that unfair fees are being tacked on for people in foreclosure, which demands redress--I smell class action. But overall, the implications seem much more disturbing for people who aren't in foreclosure.
Those rascally little scamps, with their cute little (and perfectly understandable) frauds. It's not that they deliberately broke the law to cover up liar loans, it's just that financial innovation was so wonderful that the industry couldn't keep up with it!
October 8, 2010:
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.... 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.
The problem is "systemic," not fraud, which only happened because someone made a woopsie.
Back to the present:
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.
It's not often you see an opinion-maker admit that she isn't smart enough to understand what she is talking about. It's rather refreshing, but unfortunately it is probably a lie. McArdle has bought a car and a house. She knows that if title is not transferred, she can't prove the house or car is hers. She needs a piece of paper with a signature on it and you can bet your last bottom dollar that she has one.
So far McArdle appears to be coming down hard on the Stupid side of the question but someone who was Evil would want us to think that, wouldn't they? And she is doing far too much misdirection (Look over there! Arnold Kling! Adam Levitin! Systemic failure!) to be operating purely on Stupid.
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.
Journalism. It does not mean what you think it means.
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.
It seems that McArdle does not understand that the courts do not have to accommodate businesses that broke the law, as a commenter says. She understands that the laws exists and that the companies should have followed the law, but she says that the laws were broken inadvertently by rilly, rilly smart people who were victimized by the inadequate legal system that let them accidentally commit fraud. How can we prove she is being Evil? Because McArdle is so slick we must look closely for the tell-tale signs of deceit; being very careful to not make direct claims that can be disproven and leaving out anything that might harm her argument.
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.
The law is sometimes inadequate for new circumstances and sometimes clarified by litigation but the issue is not the clarity of the laws, it is whether or not the laws were followed, which she admits did not happen.
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.
Yet she writes several posts saying that the problem was systemic, not the result of businesses breaking the laws regarding transfer of title. Look at what they do, not just what they say, and what McArdle did was write several posts downplaying the issue. Which is Evil, and not at all Stupid.
The commenters naively attempt to explain the facts to McArdle.
Serolf_Divad 2 hours ago
"There are serious paperwork issues, which banks seem to have tried to solve by throwing together some highly suspect legal documents. "
Yeah, but these serious issues are a direct consequence of the Byzantine financial intruments that were created to peddle these ridiculous "liars loan" mortgages to investors. Honestly, it's nothing less than stunning to me that we've reached the point where in many cases it's not clear who even owns delinquent mortgage in question. You've got a homeowner whose fallen behind on his payments, a bank that own the righth to "service" the debt, but the debt itself exists "out there" in some vague probability-cloud of etherial investments.
This is what happens when we as a society decide that regulation sux, and we might as well let the financial markets do whatever they want, because they "know best."
Yeah, this seems pretty silly. You can make a case for regulatory problems in banking as a whole, especially things like leverage, but the idea that deregulation--rather than regulatory failure to anticipate problems with a relatively new system--was at fault in the foreclosure mess does not comport with what I know of the issue. I'm not aware of a lot of people who were arguing in, say, 2003 that we needed to fix titling problems in MERS--I'm not saying that they didn't exist, but there was no ideological battle over the question.
rather than regulatory failure to anticipate problems with a relatively new system
Why is that the problem and not
The failure of the architects of the new system to ensure that their contracts were legally enforceable within the existing legal system.
It's not like real estate law fundamentally changed in the last two decades.
The MERS system was new, enabling the transfer of mortgages outside of the very expensive country transfer system. It turns out to have a bunch of issues.
The MERS system is a creation of the financial industry and obviously does not have legal standing in local jurisdictions. Meaning it no more valid in court than a system that I created.
Again, the problem is that the financial industry ignored existing real estate contract law.
Courts generally take a dim view of people that willfully ignore the law.
Right, but given that it had developed, the law/regulatory system was going to need to adapt. I mean "adapt" broadly--you could rule that MERS was illegal--but it had to deal with the problem somehow. MERS has created a bunch of problems that the law and regulators will need to clean up.
It's not that people broke the law so they could securitize mortgages faster and make more money. It's just that shit happens in our Brave New World of financial innovation in the greatest economy in the greatest country in the world.
If I'm following your argument correctly, you are saying that the law/regulatory system had to deal with the problem that the existing local system for transferring title is very expensive. I'm afraid that doesn't follow at all. Just because the financial system did not like paying the fees to the local governments does not mean that they local governments have to agree to reduce them.
I'm not arguing whether or not MERS is a good idea--though I will note that it was a response to a system that was neither designed, nor reformed, to handle securitization. (Whether securitization is a goood idea: also a side issue). I'm arguing that it existed, and the law will have to deal with the problems it created. It does exist, I swear.
Right, but given that it had developed, the law/regulatory system was going to need to adapt..
If I as a business owner enters into extra-legal contracts the courts won't enforce those contracts and the legislature won't retro-actively re-write the law to make them enforceable.
Either the laws apply to everyone or we are not a nation of laws.
you could rule that MERS was illegal
I don't think it is illegal, it just doesn't have any legal standing in court.
but it had to deal with the problem somehow.
And the 'libertarian' solution is to force the reckless to be liable for their recklessness.
Not retroactively changing the rules to bail them out.
They're not extra legal; they're contracts with the MERS. And the problem is not just the "reckless"; at least as I understand it, until the title is clear, these homes can't be sold. That's not a long-run solution.
The recklessness I'm referring to is writing contracts without ensuring that they are enforceable within the existing legal framework.
The financial industry as a whole obviously engaged in short cuts at various steps to avoid legal entanglements. That is flat out reckless, if not borderline fraudulent.
MERS is extra legal (ie outside of legal authority) otherwise the subject of your post would not be at issue.
JoshINHB 2 hours ago in reply to Serolf_Divad
This is what happens when we as a society decide that regulation sux, and we might as well let the financial markets do whatever they want, because they "know best."
Not really, it's more an example of businesses operating outside the existing legal system.
The solution is not retroactively changing laws to protect those lenders, but rather not enforcing those contracts and forcing the lenders to take losses and learn to comply with the law in the future.
McArdle has ignored and down-played fraud, theft and mismanagement from the financial industry (and health care industry, by the way) for a very long time and it's paid off very well for her. She might just be the worst business "journalist" who ever lived.
Next up, Megan McArdle tells us that unlike businesses, individuals can't just break contracts because "people are not corporations." To which one commenter retorts; "People are not corporations but corporations are people." Snap!
ADDED: Rortybomb examines McArdle's posts and says, " I find approaches by libertarians to essentially skip judicial foreclosure for a bank-friendly “rocket docket” quick approach (what the two suggestions above imply) to be improper." but concludes, "McArdle’s post bring up a good point; there should be clarifications on what a proper Democratic response should be to this crisis." I wonder what he feels about McArdle's solution to the problem:
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.
Retroactivly change the law to legalize the banks' illegal actions. How very libertarian.