Arnold Kling  

Maladjustment

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Refuted By Events... Huemer at TEDx...

1. Todd Zywicki writes,


the average home in foreclosure has been delinquent for 674 days--a delay that has doubled since the exposure of the robo-signing scandal ground the foreclosure process to a halt. In Florida, the time from default to foreclosure now exceeds 1,000 days. During that time the homeowner can live rent-free...

Worse than the delay, however, is the uncertainty of a foreclosure system in chaos. Current occupants have no incentive to engage in a short-sale or otherwise turn the house over to a performing borrower. Buyers have no certainty as to when delinquent properties will finally come available for purchase.

This "settlement" is actually a non-legislated tax, or more colloquially, a shakedown. But the story of banks as villains and borrowers as victims is so appealing that the well-being of the housing market and the rule of law are easily sacrificed to it.

2. Ken Rogoff says,


To make Greece competitive, wages would have to be halved. That is impossible to implement politically, but without a steep wage cut, the economy will continue to stagnate.

3. Karl Smith predicts that this graph will make the rounds:

I challenge any supporter of the sticky-wage story (Bryan? Scott?) to write a 500-word essay explaining how this graph does not contradict their view. If employment fluctuations consisted of movements along an aggregate labor demand schedule, then employment should be at an all-time high right now.


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COMMENTS (34 to date)
david writes:

#3. Sticky prices. Or sticky wages and prices, albeit with prices a little stickier than wages. Regardless it is easy to generate a anticyclical mark-up in a New Keynesianish narrative of rationally-grounded rigidities.

david writes:

A part of me wants to add that the extremum of New Keynesians waving their hands about the mechanism of price adjustment does give a very PSST way of considering things - although, of course, without the rational microfoundations, the optimism regarding fiscal and monetary policy goes away.

PrometheeFeu writes:

#1 Is pretty amazing. As I understand it, foreclosure will mess up your credit history for 5 years. But, it looks like you get to live rent-free in the house for 3 years. Seems to me there could be a nice deal where you buy a house, default on it, stay in it for 3 years saving the mortgage payments. After the three years, take 2 year's worth of mortgage payments and rent an even nicer house. (Paying the whole two years up front should overcome your credit history) Then, take 1 year's worth of mortgage payments as a down payment on a new house and do it all again.

Assuming mortgage payments are 50% higher than rent, the three years in the mortgaged house are at 50% of market price compared to renting. Sounds like a pretty sweet deal to me. Of course, if it takes less than a year and a half to foreclose, you don't break even, so there is substantial risk involved.

R. Richard Schweitzer writes:

These events lead me to wonder whether we will see a revival of the process by which we purchased our first house in Charlottesville, VA. by the "Bond For Deed." That is very much like an installment purchase, in which the seller agrees to deliver a deed, or delivers a deed to become valid, after the bond and its interest payments are completed. Thus title never moves until the debt is satified.

rpl writes:

Richard,

If the buyer doesn't get title to the house until he pays off the loan, then how does he acquire the right to live in the house? Presumably there is some other document that conveys that right (a quick glance at Wikipedia reveals that this is called "equitable title," as distinct from "legal title"). I would think that trying to terminate that right and evict the delinquent buyer would run into the same resistance that foreclosures are running into today.

Indeed, the standard procedure in Virginia is much like what you describe. Legal title for the property is assigned to a trustee, which holds the title as security for the loan until it is paid off. Apparently, a number of states use this scheme, so an easy test of your theory would be to see whether foreclosures have been easier in states that use trust deeds than they have been in states that use mortgages. Possibly they have been:

In the states that enforce "power of sale" clauses, the courts have uniformly held that by executing a deed of trust with a "power of sale" clause, the borrower has authorized the trustee to conduct a nonjudicial foreclosure in the event of default. That is, unlike a mortgage, the lender need not sue the borrower in a state court; instead, the lender/beneficiary merely directs the trustee to mail (or serve, publish, or record) certain notices required by law, culminating in a "trustee's sale" at which the trustee auctions the property to the highest bidder. The borrower's equitable title normally terminates automatically by operation of law (under applicable statutes or case law) at the trustee's sale. The trustee then issues a deed conveying the legal and equitable title to the property in fee simple to the highest bidder. In turn, the successful bidder records the deed and becomes the owner of record. Thus, the advantage of deeds of trust is that the lender can recover the value of the collateral for the loan much more quickly, and without the expense and uncertainty of suing the borrower, which is why lenders overwhelmingly prefer such deeds to mortgages.

The time periods for the "trustee's sale" or "power of sale" foreclosure process vary dramatically between jurisdictions. Some states have very short timelines. For example, in Virginia, it can be as short as two weeks.


(http://en.wikipedia.org/wiki/Trust_deed_(real_estate))

Ouch. Don't try PrometheeFeu's scheme in Virginia.

Scott Sumner writes:

I don't need 500 words. In my view the problem is nominal wages being sticky relative to NGDP. After 2008 the ratio of W/NGDP rose sharply, creating lots of unemployment. I've never based my argument on a labor demand curve with either W or W/P on the vertical axis.

Charlie writes:

This settlement is because the banks committed large-scale fraud, isn't it? It's unfortunate that there is mayhem in the housing market, but isn't the correct response, "I wish so many banks hadn't committed so much fraud. It's really messing things up."

Arnold Kling writes:

Charlie,
The "massive fraud" was harmless and irrelevant. If the borrowers had truly paid their mortgages and the banks foreclosed in error, that would be "massive fraud." This was mostly minor clerical issues. My guess is that if you measured the fraud committed by the borrowers (misleading statements about intent to occupy, misleading statements about income), it was greater than the fraud committed by the banks.

Charlie writes:

Arnold,

Each false affidavit signed was a felony. Each house foreclosed with a false affidavit was a felony. The banks committed hundreds of thousands of felonies. The Attorney Generals realized that the banks were committing massive fraud, so they started investigating. The banks then stopped foreclosure and asked for complete immunity from all criminal prosecutions (not just from fraudulent foreclosures, but also from fraudulent origination and fraudulent sales of mortgages that were fraudulently originated). Thankfully they didn't get that.

It's bewildering you can blame the Attorney Generals in all of this. Investigating crimes is their job, after all.

Charlie writes:

"My guess is that if you measured the fraud committed by the borrowers (misleading statements about intent to occupy, misleading statements about income), it was greater than the fraud committed by the banks."

This is what? Mood affiliation with lenders? If I think borrowers committed fraud, I should think lenders should also be able to commit fraud to foreclose on them? Two frauds make a right.

That makes no sense.

KenF writes:

Thank you, Charlie, for explaining the issue clearly.

Matt Waters writes:

Yeah, it's not to say wages don't go down at all in a demand shock. It's that they don't go down nearly enough to where (average wage)*(workers) equals (average wage)*(number of people willing to work who would create more than 0 value for an employer).

Furthermore, I have a hard time understanding what price markup has to do with sticky wages and prices. If wages weren't sticky, then one would assume the free market would make sure prices weren't sticky either. Therefore the return to capital would remain the same. Since consumers still choose the lowest prices, the markup has to happen for reasons other than wages falling, because falling wages would be passed to consumers.

rpl writes:

Charlie,

The people foreclosed upon had in fact stopped paying their mortgages, had they not? If so, then who, exactly, did the banks defraud? Certainly not the borrowers, unless you're going to claim that if the bank messes up the paperwork when transferring a loan, then the borrower is somehow entitled to a windfall. That doesn't seem like a particularly tenable position to me.

The fact that these alleged frauds may have been felonies is irrelevant. Lots of things are felonies that shouldn't be. The fact is, the banks did very little actual harm. At most, they skipped out on paying some recording taxes (for which they should absolutely be held accountable). They certainly didn't take anything from the borrowers that they weren't entitled to.

I'm baffled by your claim that Arnold's position "makes no sense." You're the one saying that mundane clerical errors should be elevated to the level of felony fraud and that people who didn't pay their mortgages should get to keep the houses anyhow. That is a position that makes no sense.

Methinks writes:

Here's what I learned from Charlie and Arnold's exchange:

The entire mortgage market is a giant fraud machine. Fraud piled on risk shifting.

Thank goodness the politicians stuck their noses into it back in the 30's because without that, we wouldn't have such comedy. The United States government's comedy generation is quickly rising to the level of the Soviet government's.

Charlie writes:

"The people foreclosed upon had in fact stopped paying their mortgages, had they not?"

How do we know? In half of states we have judicial foreclosure. That means someone, usually a bank employee, reviews all of the documents required to foreclose. She has some important things to do. She has to make sure that the documents show that the homeowner is in fact delinquent and that the bank does in fact owns the loan and the house in delinquency. Then this person signs an affidavit, swearing to a judge that they've reviewed all the documents and it's clear we can legally foreclose on this house.

Of course, they weren't doing any of that. They weren't reviewing any of the documents and they were lying to the judge.

Worse, through incompetence, many of them seem to have lost the documents that prove ownership and the loan origination documents, so they've tried forging them (is that one of those bad felonies or is that a felony that should be ok?).

How did the banks respond when the AGs started investigating? They stopped foreclosures entirely. They didn't just stop robo-signing. They didn't just stop forging docs. They stopped all foreclosures. Why? Maybe they can't control their loan servicers. (Incompetence) Maybe they realize that this foreclosure mess is kind of a big deal and that they can hold the economy hostage to get off criminal investigations for all the, you know, crimes they committed. That after all is what they asked for.

I can't believe I'm on a libertarian blog and things like failing to be able to prove you own someone's property before you take it, is being called "a mundane clerical error." And people are arguing that lying to a court about it shouldn't be a crime.

Charlie writes:

"The people foreclosed upon had in fact stopped paying their mortgages, had they not?"

How do we know? In half of states we have judicial foreclosure. That means someone, usually a bank employee, reviews all of the documents required to foreclose. She has some important things to do. She has to make sure that the documents show that the homeowner is in fact delinquent and that the bank does in fact owns the loan and the house in delinquency. Then this person signs an affidavit, swearing to a judge that they've reviewed all the documents and it's clear we can legally foreclose on this house.

Of course, they weren't doing any of that. They weren't reviewing any of the documents and they were lying to the judge.

Worse, through incompetence, many of them seem to have lost the documents that prove ownership and the loan origination documents, so they've tried forging them (is that one of those bad felonies or is that a felony that should be ok?).

How did the banks respond when the AGs started investigating? They stopped foreclosures entirely. They didn't just stop robo-signing. They didn't just stop forging docs. They stopped all foreclosures. Why? Maybe they can't control their loan servicers. (Incompetence) Maybe they realize that this foreclosure mess is kind of a big deal and that they can hold the economy hostage to get off criminal investigations for all the, you know, crimes they committed. That after all is what they asked for.

I can't believe I'm on a libertarian blog and things like failing to be able to prove you own someone's property before you take it, is being called "a mundane clerical error." And people are arguing that lying to a court about it shouldn't be a crime.

KenF writes:
The people foreclosed upon had in fact stopped paying their mortgages, had they not? If so, then who, exactly, did the banks defraud?

This is like saying that police should plant evidence whenever convenient, as long as the suspect is actually guilty.

Purple Tortoise writes:

Sure, people who don't pay their mortgages deserved to get foreclosed on, but if the banks don't do the paperwork properly, the chain of title may be muddled. The fraud is not primarily upon the people foreclosed on, but on the system of property ownership.

rpl writes:
I can't believe I'm on a libertarian blog and things like failing to be able to prove you own someone's property before you take it, is being called "a mundane clerical error." And people are arguing that lying to a court about it shouldn't be a crime.
Oh, please, spare me the melodrama. There was and is no real dispute about who owned the loans or whether the payments were current. The paper trail was certainly clear enough as far as who was supposed to receive payment, so I really don't understand how you can claim that we don't know who owns the loans. What did you think was happening to the money back when the borrowers were paying their mortgages?

The paperwork that was missing (probably because it was never filed) was the paperwork that records the transfer of the lien. Since nobody seriously believes that any of those loans were supposed to transfer without the associated lien, yes, that qualifies as a clerical error in my book.

Even if you don't believe we should take the transfer of the liens with the loans as a given, then the victim of the alleged fraud would still have to be, not the borrower, but the lienholder of record, and none of those entities claim to have been wronged (nor are they receiving any compensation from the settlements).

I reiterate, the actual ownership of these loans is clear from the paperwork that exists. The supposed controversy over who "really" owns the loans is a legal fiction manufactured by people who stand to realize a windfall if their mortgages are invalidated. There is ample proof of ownership of the loans, and it is in no way un-libertarian to suggest that people who have stopped paying their mortgages should be foreclosed upon.

This is like saying that police should plant evidence whenever convenient, as long as the suspect is actually guilty.
No, it's like saying that if the police have fingerprints and eyewitness accounts that place the suspect at the crime scene, then you shouldn't acquit because the DNA test was botched.
The fraud is not primarily upon the people foreclosed on, but on the system of property ownership.
Yes, because allowing people to borrow money to buy houses, fail to repay the loan, and keep the house anyway is so much better for the "system of property ownership."
KenF writes:
No, it's like saying that if the police have fingerprints and eyewitness accounts that place the suspect at the crime scene, then you shouldn't acquit because the DNA test was botched.

No, it's not like that. It's like botching a DNA test and then lying, saying you didn't botch the DNA test, and that it proved the accused was guilty.

Methinks writes:

I can't believe I'm on a libertarian blog and things like failing to be able to prove you own someone's property before you take it


rpl makes a good point, but your wording in the above bolded sentence is strange, Charlie. It implies that people who borrowed money to buy property actually own it even if they've not repaid the loan and the lender has no right to it by default because one piece of the paperwork might be missing.

This weekend I discovered I've misplaced the title to one of my cars. Does that mean that I don't actually own it and if I claim to a judge that I do I'm committing fraud?

Methinks writes:

No, it's not like that at all, Ken. There's no question to whom the borrowers were making payments before they stopped. There is no question that the borrowers were guilty of not paying. Are you saying these poor folks were making payments to the wrong entity and stopped when they realized their mistake?

Charlie writes:

Methinks,

Yes, when you buy a house with borrowed money you do own that house. Yes, for the lender to have a legal claim he must prove you are in default and prove he in fact owns the loan. These are not trivial burdens.

Charlie writes:

Also, your analogy is wrong. The question is, if I want to take your care from you, should I have to be able to prove that I'm the rightful owner?

If I sign a sworn statement to a judge that I am the rightful owner and can prove it, have I committed a crime?

KenF writes:
Are you saying these poor folks were making payments to the wrong entity and stopped when they realized their mistake?

You are right. Banks should be allowed to fabricate any document at will as long as they think they are in the right. Banks are trustworthy institutions answerable not only to shareholders but also to their customers. That should be enough to guarantee that any document they fabricate should be fabricated in the service of fairness and justice, and thus acceptable in any legal proceeding.

Purple Tortoise writes:
Yes, because allowing people to borrow money to buy houses, fail to repay the loan, and keep the house anyway is so much better for the "system of property ownership."

I'm not suggesting that people should be able to keep houses after failing to repay. I'm saying that banks should be required to do the proper paperwork with the legally required documentation so that chain of title and the presence of liens is not clouded.

Methinks writes:

Also, your analogy is wrong. The question is, if I want to take your care from you, should I have to be able to prove that I'm the rightful owner?

Only if I happen to have borrowed money from you to buy the car, the contract between us specifies that the car is collateral, you have supporting evidence that I was paying the loan and stopped paying would you have a leg to stand on. Missing a couple of pieces of paperwork does not change the fact that I owe you and that the car is collateral for the loan. The lenders in question weren't without evidence.

Which, of course, doesn't mean that creating fraudulent documents is acceptable, but it also doesn't mean that the lack of authentic documents is proof that the houses were not held as collateral and that the lender is denied its contractual right.

Are you seriously claiming that lenders claimed to have made loans they never made or do you think it is more moral for people to rob others on a technicality than it is to fabricate a document for property one has a legal right to?

As soon as the property you purchase becomes collateral for a loan, you don't really own it in any meaningful way. My house is collateral for my loan and the lender forces me to do stupid things like insure it (the insurer will is too undercapitalized to pay out on a claim, but I digress) and it will foreclose on the house and sell it to settle the loan if I should default. Is that not what you were led to believe with regard to your mortgage? Do you think there's widespread confusion about these terms?

You are right. Banks should be allowed to fabricate any document at will as long as they think they are in the right.

Yes, Ken. If someone defaults on a loan then it obviously follows that the lender should fabricate whatever suits it. That's almost as good as your DNA analogy.

Of course, using your own logic, it's fine for borrowers to fabricate whatever they want to obtain loans that make the property they bought with other people's money theirs free and clear the moment they sign the deal.

Anything to distract from the fact that there is no dispute that loans were taken from the lenders and defaulted on and that the property in question is collateral for the loan. It's a cute feature of the American legal system that a procedural issues (A misplaced document, for instance) can enable the state to separate a person from his property.

And that, my friend, goes for the little guy as well as banks. Your house may commit the crime of housing your kids' friend's stogie and you may find your house seized because, while you obviously committed no crime, your house committed a felony and must be seized. Hey, technically, it is a felon! Reason be damned.

James A. Donald writes:
This weekend I discovered I've misplaced the title to one of my cars. Does that mean that I don't actually own it and if I claim to a judge that I do I'm committing fraud?

The banks were in fact making errors with alarming frequency.

By and large, most people foreclosed upon had stopped paying, though far from all of them, but it is probable that in many, possibly most, cases, the party attempting to foreclose was inadvertently or deliberately defrauding the rightful owner of the mortgage.

The relevant analogy would be that you misplaced the title to one of your cars, and then you sold it to someone, and he sold it to someone else, not quite sure of the name, and then ...

Charlie writes:

"Only if I happen to have borrowed money from you to buy the car"

You do owe me money for the car. I've reviewed all the documents. I've signed an affidavit to a judge (that only matters in 25 states in the others I'd just take your car and it's up to you to sue me). Too bad you lost that title...

"Of course, using your own logic, it's fine for borrowers to fabricate whatever they want to obtain loans that make the property they bought with other people's money theirs free and clear the moment they sign the deal."

What's with all this mood affiliation? Two wrongs don't make a right. If I am against bankers committing fraud, I must be for borrowers committing fraud? Consider when you say things like this that you may not be thinking logically.


"The lenders in question weren't without evidence."

I didn't correct you earlier, but I will now. One of the central problems is that the person isn't the lender, at least not in the since you mean it as "owner of the foreclosed house." The person foreclosing is the loan servicer. He sold the loan a long time ago. And in some cases he may have sold it multiple times. In many cases, it appears they never legally transferred title. It's quite possible in many of these cases, we may not know who owns the loan. At least, that's what people close to the situation are saying. After all, why are all these banks doing these ridiculous things. I mean it's a bank, it's usually pretty good at paperwork. Why resort to robo-signing and rampant fraud?

Here is a link for anyone interested.

Charlie writes:

"commit the crime of housing your kids' friend's stogie"

Haha, also, a stogie is a cigar. I think you'd escape Johnny Law... What a comical end to a ridiculous argument.

rpl writes:

I just don't see how any reasonable person could believe that the ownership of these loans is in legitimate dispute. To believe that, you would have to believe that back when the loan payments were actually being made, the proceeds were distributed essentially at random, and that everyone in the industry was ok with that. That simply isn't credible.

As I look back over the comments here, there seems to be a lot of anti-bank bias at work. If the shoe were on the other foot, if people who had obviously paid their mortgages were being thrown out of their homes because of some trivial defect in the loan documentation, would these same commenters be arguing in favor of it? I doubt it. It would be seen as Kafkaesque, and with good reason. Pretending that we don't know who owns these loans, just because some of the paperwork is not in order is no less so.

Methinks writes:

I'm not very cool, Charlie. Certainly I'm not cool enough to have ever done drugs and because English is my second language, I often have trouble with slang in areas that are apparently very familiar to you but completely unfamiliar to me - like things to do with frying my brain. As it happens, though, I do think Cuban cigars are illegal in the U.S. and the local cops will happily relieve you of your property. Are you unfamiliar with Civil Forfeiture?

If I am against bankers committing fraud, I must be for borrowers committing fraud?

When using Ken's logic, then yes. That's exactly ken's logic in his last post. Speaking of ridiculous errors - read carefully.

Finally, the article to which you link basically illustrates how ridiculously complicated structures get in the face of endless regulation and an overly complicated tax system. You and its author aren't claiming that borrowers didn't stop paying their mortgages. You'd just like to let borrowers off the hook on a technicality.

Charlie writes:

"Are you unfamiliar with Civil Forfeiture?"

Of course, I'm familiar. So what?

"When using Ken's logic, then yes. That's exactly ken's logic in his last post. Speaking of ridiculous errors - read carefully."

I hate to be the one to have to tell you, but he was being ironic. When he said, "Banks should be allowed to fabricate documents..." he meant the opposite. He was making fun of your argument.

"You'd just like to let borrowers off the hook on a technicality."

Where did I say that? I said, "isn't the correct response, "I wish so many banks hadn't committed so much fraud. It's really messing things up.""

I'm arguing the banks as loan servicers have monumentally messed up. I'm arguing that they've done a whole spectrum of things that are both fraudulent and incompetent, and it's messing a lot of things up.

Maybe you think it's dumb that we register titles. Maybe you think it's unnecessary to have to have documentation and proof to foreclose on someone. Maybe you even think it's ridiculous that it's illegal to lie to a judge about having these things, after all, you think they are silly and unnecessary anyway.

Even still, that is the system we DO have and it's always been that way. It's inexcusable the banks were unprepared to deal with it. How could hundreds of thousands of false affidavits not cause an investigation by AGs? How could a total failure to keep a record of ownership not create a nightmare in court?

Charlie writes:

"As I look back over the comments here, there seems to be a lot of anti-bank bias at work."

It seems pretty clear the bias runs in the opposite direction. Arnold's written many posts on "predatory borrowing" condemning people for lying on mortgage documents, and rightfully so. But when banks sign hundreds of thousands of false affidavits (sworn statements to judges) and have failed to appropriately to document and register these mortgages numerous times, he calls them, "mostly minor clerical issues." We are just for equal opportunity fraud or at least incompetence.

This stuff is important. For our legal system, for any capitalist system, it's important to document who owns things; it's important property is registered some central place so two people don't think they own it at the same time, and it's important when someone sends a sworn statement to a judge that it is truthful.

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