We Institutionalize Kleptocracy

That’s how Yves Smith describes the probable outcome of the latest bunch of mortgage finance scandals.  We already know that lenders lied, brokers lied, consumers were instructed to lie, and the whole house of cards was built on perpetually-rising land prices. In recent weeks, and especially the past couple of days, we are learning that the back office lied too, nobody bothered to process much of the paperwork, it was easier to just forge documents as needed, and for many parcels it will be difficult or impossible for tell who really owns the mortgage (which likely will never be repaid anyway as it far exceeds what the property could be sold for).

The solution? Smith (and others) expect the federal authorities to move in,

Now that judges in some states are starting to take these dubious, potentially fraudulent measures seriously, the next line of attack is to get the more bought and paid for Federal government to intercede on behalf of the banks.

Which I suppose would be consistent with the way they’ve handled other aspects of the financial breakdown.  Smith also makes the point that this is in fact a states’ rights issue, real estate records are one of the legitimate functions of state and local governments. And back in the old days, before real estate finance became efficient, loans typically stayed in the same state as the property that secured them.  Some still do.

By all means read Smith’s original post, and the links from there to her (and others’) earlier writing.

Of course this mess illustrates geoist principles.

  • It never could have happened if land was not an object of speculation.  If folks expected housing prices to remain more or less stable, nobody would buy a house they couldn’t afford just because they feared being even less able to afford it in the future, nor because they saw it as a good investment.
  • And it will happen again, in a similar but different way, a few decades from now, unless policies are changed to use land rent as the main source of public revenue.
  • It also illustrates the dangers of complex financial arrangements.  Not that they could never be legitimate, but usually they are not. Rather, they represent a way for “the smartest guy in the room” to enrich himself, at the unwitting expense of the rest of us less smart guys.

It also renews my curiousity about Torrens title.  This is an alternative system of land titles, where the government keeps all the records and guarantees all the titles.  Originating in Australia, it was tried in some U S jurisdictions, notably Cook County where it collapsed under the weight of government corruption.  Elsewhere it is still in use, apparently working well.   Of course it would put the title insurance companies out of business, and reduce legal costs, which may help explain why it’s little used here.

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