Monday, January 30, 2012

US: Cleaning up the Mortgage Registration System

If you want to understand why the current financial crisis remains unresolved, you need look no further than the article by Hernando de Soto in today’s Financial Times. Mr. de Soto is author of The Mystery of Capital, where he showed that by documenting the community-based agreement on who owned what, it was possible to provide collateral to the poor—and thus allow the poor and marginalized communities to borrow money from banks, for the first time.

In the FT article, Mr. de Soto explains that the problem is that “To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation.” More precisely, it is a matter of formally documenting the trillions in loans that were made by lenders to homeowners.

Those loans were recorded in a system known as MERS, the mortgage electronic registration system established in 2004 by private sector lenders to formally record residential mortgage loans to homeowners. This was long before the explosion of securitization. Unfortunately MERS has never worked perfectly. Safe and Fair Blog estimates that for every home loan under foreclosure, the borrower has a 50:50 chance of being able to prove that the holder of the mortgage loan is not the lender of record – and therefore the lender lacks the legal authority to foreclose on the loan and evict the homeowner from her or his house. Safe and Fair Blog does not recommend such a tactic. Certainly the homeowner knows that she or he took on a loan and that s/he has a moral responsibility to repay the debt. However the failure of a privately-owned debt registration system in the U.S. should not be allowed to imperil the global financial system.

This is not, strictly speaking, an issue of consumer protection and financial literacy. However the failure of the MERS to work properly undermines the financial vitality of tens of millions of financial consumers by destroying the financial markets that financed their homes. The vagaries of MERS thus impede the ability of homeowners to sell their primary financial assets (their homes) and move to a part of the country where jobs are plentiful and their skills are in scarce demand.

Part of President Obama’s State of the Union speech should surely have been to clean up this badly working mortgage registration system – and allow the U.S. economy to get back on its feet. The question is ... why hasn't this been done by now?

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