What would George Washington think if he could see the latest travails in America’s mortgage fiasco? Washington, as I recall from my grade-school history reading, was a trained property surveyor, which would have made him familiar with a process that is critical in determining ownership of a home.
If Washington were to visit the county office where property records are maintained, he might feel right at home. Often, documents have the same legal format as in the 18th century, and they are maintained in pretty much the same manner.
On the other hand, if Washington were to visit a 21st-century financial firm that deals in mortgage securities, he would be thoroughly bewildered. There he would find computers maintaining records in electronic format that are far more complex than anything that existed in his day. No longer is a mortgage loan owned by a local bank engaged in a long-term relationship with the borrower. Instead, the loan has been sold, packaged, subdivided and allocated according to complex formulas to a variety of owners around the world. In the process, the rights to receive the borrower’s payments, along with the right to seize the property if the borrower defaults, have been transferred many times.
What has emerged in recent weeks as “the foreclosure scandal” represents the collision of this 21st-century computerized, global financial system with an 18th-century legal process for obtaining ownership rights to buildings and land. Indeed, the United States has one of the most backward land-title systems in the industrial world.
If we wanted, we could apply modern technology to the land-title process. We could base property boundaries on satellite photography rather than on surveyor’s sketches. We could use precise coordinates for latitude and longitude instead of references to topographical features. We could maintain records in digital format, where they could be accessed on the Internet.
I am not saying that we can make property records easy and foolproof. I know someone who lives in a condominium where two owners share the same storage locker. That creates a property right that strikes me as rather unclear. What if a new owner of the second condo claims that the first condo owner is taking up too much space, or the wrong space, in the locker? No amount of computerization can remove all ambiguity.
Still, we could go a long way toward bringing title records into the 21st century. Doing so would provide a number of benefits. For instance, we could make property ownership sufficiently secure that we could do away with the wasteful, expensive service known as title insurance. Title insurance indemnifies the owner against past mistakes that might later be used to deny clear title to that owner. If we had a reliable titling system, owners and mortgage lenders would not need such insurance.
A modern titling system also would reduce the cost to mortgage lenders of complying with the process of recording a title. A mortgage is a legal document that is entered into the property records in order to prevent a borrower from improperly selling a property on which there is an unpaid mortgage loan. When foreclosing on a property, the lender must, like any other seller, establish clear rights to the property before selling it. It is in that step - where the lender must produce the proper paperwork to comply with legal standards using antiquated recording methods - that many banks apparently took shortcuts, forged signatures or used documents that were only re-creations of the originals.
I am not a lawyer, nor am I familiar with any of these cases. I am not qualified to judge the severity of the banks’ errors and omissions. However, I know that the ultimate losers from this will be you and me. The higher the cost of foreclosure, the more banks have to charge to cover their costs of mortgage lending. In the end, mortgage interest rates for all borrowers will be higher because of the difficulty lenders face in complying with antiquated systems for title transfer.
With foreclosures held up by legal challenges, who will be the winners? The delinquent homeowners, who are not exactly heroic figures, may get to stay for free in their houses for a while, until the mess gets straightened out. But in the end, they have not made their payments, and they will have to forfeit their homes.
The real winners will be lawyers, whose eyes shine with the dollar signs of class-action lawsuits. In fact, as you read stories about the foreclosure scandal, you should realize that it is in the interest of lawyers to feed reporters the most lurid tales of improper behavior, the better to whip up public support for a settlement in the hundreds of millions of dollars, much of which will go to the litigators.
George Washington probably would be sick of the whole business.
Arnold Kling is an adjunct scholar with the Mercatus Center at George Mason University.