Arrunada Seminar: Benito Arruñada – Underprovision of Public Registries?

4 February 2013 at 5:22 am 3 comments

| Benito Arruñada |

Underprovision of Public Registries?

Organizing registries is harder than it seems. Governments struggled for almost ten centuries to organize reliable registries that could make enabling rules safely applicable to real property. Similarly, company registries were adopted by most governments only in the nineteenth century, after the Industrial Revolution. Moreover, though most countries have now been running property and company registries for more than a century, only a few have succeeded in making them fully functional: in most countries, adding a mortgage guarantee to a loan does not significantly reduce its interest rate.

US registries show that these difficulties do not only affect developing countries. Many US registries are stunted, shaky institutions whose functions are partly provided by private palliatives. In land, the public county record offices have been unable to keep up with market demands for speed and uniform legal assurance. Palliative solutions such as title insurance duplicate costs only to provide incomplete in personam guarantees or even multiply costs, as Mortgage Electronic Registry Systems (MERS) did by being unable to safely and comprehensively record mortgage loan assignments. In company registries, their lack of ownership information means that they are of little help in fighting fraud, and their sparse legal review implies that US transactions require more extensive legal opinions. In patents, a speed-oriented US Patent and Trademark Office combines with a strongly motivated patent bar to cause an upsurge of litigation of arguably dangerous consequences for innovation.

The introduction of registries has often been protracted because part of the benefits of registering accrue to others. They also have to compete with private producers of palliative services (i.e., documentary formalization by lawyers and notaries) who usually prefer weak or dysfunctional registries, as they increase the demand for their services. Moreover, most legal resources, including the human capital of judges, scholars, and practitioners is adapted to personal instead of impersonal and registry-mediated exchange.

Information and communication technologies have opened new possibilities for impersonal trade, thus increasing the demand for the institutions, such as registries, that support impersonal trade. Economic development therefore hinges, more than ever, on governments’ ability to overcome these difficulties, which are allegedly holding back the effective registries needed to enable impersonal exchange and exhaust trade opportunities.

Entry filed under: - Lien -, Institutions, Law and Economics, New Institutional Economics, Theory of the Firm.

Creativity and Property Rights Hayek and Organizational Studies

3 Comments Add your own

  • 1. SLW  |  7 February 2013 at 7:51 pm

    In Venezuela, to have effects vs third parties a sale must be registerer a the Public Register ( You says it has private effects but , that s the name).
    The title says things like this,limits.:north with property that belongs or belonged to Rafael Urdaneta ( who died 180 years ago). Legally they must refer to the catastrum but must lawyers are unable to deal with it.
    it must be drafted and signed by a lawyer.
    If someone occupy it you have the interdicts to recover possession. You must prove possession not property( the title works ad colorandum possesionem ). If his possession is longer you must use the actio reivindicatio . To succeed you must prove the documentary chain for 10 years( statute of limitation with tittle) because the document proves that you and the seller said in front of the functionary that you bought not that you are the owner .
    Even worse you must register your tittle and the previous one. But If you acquired as heir the title is immaterial and impossible to register.
    Judges can issue justificativo de perpetua memoria: witness , usually the builder, say that you owns a construction and that is used then to claim government owned lands. They are worthless ( legally) but required with the blessing of lawyers
    Since 1960, there is no legal way to acquire land in the countryside and since 1999 the government wants you to show that you owned the land in 1854 or before to recognize you as a legal owner
    The Civil Code is based in the spanish of 1865 with additions from the French Italian obligations code project. Of course ,updated with modern family rules

  • 2. policyanalysis  |  17 May 2013 at 1:15 pm

    Arguably, the subprime crisis would not have happened with a functioning registration system in the US, in which either the registry itself or a notary authenticating a mortgage is bound by law to examine the legality of the contract and the absence of contradictory rights before it is registered (Robert Shiller, 2008). Most certainly, however, the lack of such a system in the US severely slows the solution of the crisis most adequate in terms of both contract theory and macroeconomics (H. Schmiegelow and M. Schmiegelow, 2009). Remarkably, leading economists of both neo-classical and Keynesian persuasion (Feldstein, 2011; Krugman, 2011) did plead strongly for mortgage modification as a crucial method of solving the subprime crisis. The Obama administration attempted various programs of mortgage modification, unsuccessfully on the legislative level and with mixed results on the level of the executive agencies. The Congress remained deeply divided ideologically on many points, among others on the issue of whether “predatory lenders” or “predatory borrowers” had caused the crisis. In the end the Dodd-Frank Wall Street Reform and Consumer Protection Act (US Congress, 2010) was adopted. This is considered to be the most ambitious regulatory reform since the Great Depression with the aim of preventing recurrence of similar crises in the future. But replacing the costly, time consuming and nonetheless legally uncertain American recording system was regrettably not part of the reform.

    TARP Inspector Neil Barofsky understandably called for supervised screening of each mortgage slice packaged in each mortage-backed security to prevent conflicts of interest or fraud. Given the structural impediment of the American recording system, this promises to slow the solution, and magnify the cost, of the crisis to an incalculable extent. Of course, law suits between mortgage lenders and borrowers as well as sellers, buyers and insurers of mortgage-backed securities have begun in the US and may take many years at considerable legal cost, the longer they last, the higher the cost. Meanwhile banks are reluctant to channel the Federal Reserve’s generous liquidity provision through quantitative easing into new lending.

    Benito Arrunada’s arguments are highly relevant in terms of both institutional economics and legal origins theory. On the level of institutional economics it would be interesting to analyze the impact of the presence of functioning recording systems on intermediate factors of growth, such as lending volume in various samples of countries in long times series since the establishment of the system in each country. For legal origins theory (La Porta et al., 2008), Arrunada’s work presents a significant challenge, as the presence or absence of functioning recording systems cuts across the common law/civil law divide. One leading country each of the common law and the civil law tradition, the US and France, share the inefficient recording system.

    Michèle Schmiegelow, Université Catholique de Louvain

  • 3. Benito Arruñada  |  29 May 2013 at 12:24 pm

    I agree that well-functioning property registries would help avoiding some of the problems in mortgage markets that have emerged with the financial crisis. For instance, some of the difficulties experienced by the foreclosing process in the USA can be traced back to the inadequacies of the American land recordation offices, which in turn led to the creation of MERS by mortgage industry, which ended up suffering all the drawbacks that private registries often face at the time of public enforcement.

    We must separate, however, the effects of registries from that of conveyancers, such as notaries. As I argue in the book (179-ff.), there is no basis to the suggestion by Robert J. Shiller in The Subprime Solution (Princeton, 2008) that the problems of information asymmetry allegedly prevalent in the US mortgage market can be solved by requiring professional intervention resembling that provided by civil law notaries. In particular, this suggestion does not stand up to observation of contractual practices during the real estate bubble in civil law countries. For instance, in Spain, notaries’ intervention did not avoid a wave of litigation by debtors alleging, for example, that at the time of signing the mortgage loan they had not been properly informed of the “recourse”—that is, unlimited liability—nature of the loan and of the existence of a “floor” on its variable interest rate.

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