December 28, 2011

Home sweet home

"Work hard and you will get the reward". That is a tenet any good parent would like to teach their children. The idea rests on the basic principle (assumed to be true) that whatever reward you get will not be snatched from you by someone else. The principle in question: Property Rights.

Property rights are a keystone of human civilization. When we discovered farming, the primitive farmer had to make sure whatever he was growing was not going to be stolen by any passing nomad tribe that "didn't get the memo" that a farmer was growing something for his own consumption or benefit and that it could not just be taken. Imagine how difficult it was to go from communal to private property. Enforcement of property rights became one of the primal functions of proto-States and other central authority entities created in the beginnings of civilization. The difficulty of enforcement of property rights even shapes human culture. The "culture of honor" displayed in the rugged terrains of the U.S. Appalachians -which was the cause for multiple family feuds and killings between 1860 and 1930- was a consequence of a lack of proper property rights enforcement.

Property rights are also a key determinant of economic activity. The better developed property rights are, the most advanced a country is (the highest-ranked countries by property rights protection: Norway, Netherlands, Denmark, Sweden, New Zealand, U.K. Germany, Australia. The U.S. ranks 14th along with Canada & Ireland). Entrepreneurs' investment decisions will be greatly dependent on whether or not they will be able to enjoy the fruit of their effort, and this also applies to savings and possessions. Why owning anything if it can be snatched away from you in the blink of an eye?  Property rights are, thus, the very foundation of Capitalism and of economic development in a country.

Out of all the possessions anyone can have, your home is the most important one. It is the ultimate fruit of your labor, the place where you raise your family and the one asset that can even provide –some would argue- emotional stability. The house stock of the U.S. is $16 trillion -- more than 1x one year's GDP of the country -- representing the biggest asset of households. The system that supports and regulates real estate ownership has traditionally been based on physical records kept in Title Rooms and County Courthouses administering them. Land and Property records have been paramount in the determination of who owns what property in this country.

But then MERS happened.

Created by the biggest mortgage banks, it is the black box where property titles that collateralize mortgages are transferred every time a mortgage is sold to another bank, or packaged as a pass-through security, or wrapped in a MBS, or re-packaged CMO. It was a financial innovation -or workaround, really- to enable easy exchange and transferability of a title that otherwise would have required a person going to the Title Room, peruse over hundreds of records, finding the title in question and go through the Courthouse paperwork to change the beneficiary in the Lien. One huge problem created by MERS: mortgages change hands so many times they simply lose track of who is the legal beneficiary in the Deed of Trust.

People are realizing that legally challenging their lender to produce the title is a winning strategy: banks that can't prove they have the title have to give up the claim and let the homeowner get the house back."Quiet-title actions" are proliferating and organizations are starting to foment these types of legal challenges. The implications for the legal system and the banks' profits could be huge. No wonder bank stocks are in the tank (BofA Price-to-book is 0.26x) while they keep getting hit by more and more lawsuits.

We are talking about property valued in the Trillions (in 2007 MERS registered two thirds of all mortgages in the US) that cannot be traced back to the real beneficiary. We are talking about homeowners diligently paying their mortgage for decades only to find out after all those years that they cannot get their title back because the nominal "owner" of the mortgage cannot produce the title. We are talking about the biggest, most important asset in the U.S. economy being thrown into legal limbo. This is a major blow to the backbone of property rights, and serious threat to the very foundation of Capitalism itself.

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