The Real Scandal

Ordinarily we try to ease the reader into the cesspool that is the work of Megan McArdle, but today you're on your own.

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.

Like not doing the paperwork to legally transfer the title. Courts are very particular when it comes to filling out the paperwork correctly. If you don't fill out the paperwork correctly the court doesn't know if you're lazy or dishonest, they just know that you haven't followed the law and there will be consequences.

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.

Yes, if you don't legally own a house, you don't own it. That's so people can't just go around and take other people's property. For instance, McArdle just bought a house. If McArdle didn't have the title of the property transferred to her name, she doesn't own the property. And if she were to be shit-canned by The Atlantic to make way for a younger, more telegenic ecnoblogger (God forbid!) and P. Suderman, boy bride, were to be the sole resource for paying off the house, the car, the student loans and their expenses, she just might find herself in need of the laws regarding transfer of title after all.

That is bad.

It's big of McArdle to admit this, but we are dealing with banks, so we know that allowances must be made, somewhere and somehow. How will McArdle wiggle her way out of this dilemma? She loves owning things and just bought a house after years of pining for one, yet the banks want to take houses away from people. But these are banks, which are the most important institutions in the entire history of the universe. How will McArdle reconcile these two colliding worlds??

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.

Ah, her usual method: bait and switch. She switches from talking about invalid foreclosures due to illegal transfers of title to talking about invalid foreclosures due to other issues. Now she can claim that the whole problem isn't very serious after all since the other issues aren't serious, according to her.

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.

Assuming she's correct (work with me, folks!) that's right. They're irrelevant to the title problem. McArdle is doing her usual obfuscation and misdirection. Usually when we wish to redirect someone's attention we say, "Look! There's George Clooney/Megan Fox/an ice cream truck!" depending on the sex and age of the person we're trying to distract, but The Atlantic has more sophisticated methods, such as blowing smoke or throwing sand in people's faces.

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.

Interest groups! Shakedowns! Protection rackets! Gosh, that property title system sure is antiquated and corrupt because Mr. Kling says it is.

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.

Then why are they rushing through the foreclosure process so fast that they aren't even doing the paperwork?

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?

Stupid people and their greed. Not the banks, though. Sure, they were in such a hurry to make fat fees and bonuses by selling as many mortgages as possible that they didn't even bother (and maybe wouldn't have been able) to transfer title but it's not because they're greedy--it's jut that rich people work harder/faster/better than everyone else.

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.

McArdle has a big and generous heart that bleeds for the poor homeowner. Therefore, whatever she says next in the support of banks will be fair and balanced.

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.

No, this is what happens when people don't follow the law. It doesn't mean the law is bad, necessarily. It means the bankers were very naughty and couldn't be bothered to follow the law, even though it caused them and everyone so much trouble later on.

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.

We must let the banks break the law not for themselves, but for the Little People.

As Hernando de Soto has chronicled,

Oh for Christ's sake.

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.

Or we could follow the old ones instead of reinventing the wheel every five minutes.

I don't know if the the bill that Obama just pocket vetoed would have done more good than harm.

Why not? Can't she read?

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.

Why would he? Especially when he's already done plenty to help the banks and has told everyone to shut up if they didn't like it. Imaginary Obama is much nicer than Real Obama, even for conservatives.