Wednesday, June 14, 2017

Long review: of land (and other) registration

Benito Arruñada, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries: This books only significant weakness is the extremely dry and abstract way in which its written; theoretically it is extremely helpful in explaining the special functions of property registries.  At the core, a registry allows public knowledge of who owns what.  This enables third parties to understand who has the power to transfer property, encouraging the ability to contract with strangers.  When a registry or other similar publicity mechanism (the law of agency is his prime example, along with the corporate form) is in force, then it is possible to switch from the common-law rule of nemo dat to a rule that protects the interests of bona fide purchasers without notice (BFPs).  In other words, the true but unrecorded/unpublicized owner in a case of a transfer to a BFP by a perfidious agent, or by a perfidious land seller, is no longer protected by a property rule entitling her to the return of the wrongly transferred property, but instead by a contract rule entitling her to damages from the wrongdoer. 

If principals want a property rule, they must publicize their claims.  Contract rules that favor acquirers are then applied only when property owners consent, or are deemed to consent, to them by appointing agents or by not using the recording system.  The registry therefore serves as an enabler of modern, impersonal transactionsnot the nightwatchman-state, but the recorder/register state as a key foundation of a well-functioning free market where the system substitutes for trust based on personal knowledge.  Unless registration or recordation is required, one always has a choice about keeping information private, but subject to risks of losing property to good-faith purchasers without notice.  Reciprocally, these improved mechanisms for assessing risk enable the end of debtors prisons and the allowance of personal bankruptcy, as the harsh consequences of never releasing a person from individual liability become less important to incentivize performance when creditors know which assets they can attach.

The books historical comparisons provide some color.  When Arruñada discusses the use of symbolic marking to claim ownership, he mentions its use on valuable movables such as livestock, automobiles, and books, but also for spouses, with the wedding ring used to give notice of marital status.  Also, in ancient Athens, a slab (horos) could be posted on the land itself, to be removed only by releasing the encumbrance”—the horoi included a statement of the nature of the horos as security and often the creditors name and amount of the debt.  Arruñada identifies this as one of the first systems to enable use of land as collateral without transferring ownership or possession to the lender.  Later, I was fascinated by the initial reaction to public company registries (a prerequisite for limited liability) in France, when judges in Paris failed to understand the advantages of impersonal transactions and insisted that traders must know their trading partners.

Arruñada draws a number of provocative lessons from this basic framework, including that policies directed at formalizing land title may not be appropriate, or pro-development, in countries lacking other preconditions for impersonal transactions such as a functioning, neutral judiciary for enforcement of contracts.  Registries and recorders (distinguished because the former evaluates the quality of the claim, and the latter simply records all claims that meet its formal standards) are expensive, and not always worth the costs.  They may be necessary, but they arent sufficient for a modern economy.  Arruñada argues that public demand for registries is the best signal of their appropriateness (meaning that subsidizing them to spur development is probably a bad idea), and thus that recording should generally be voluntary, especially in the early stages.  Attempts to formalize titling have often foundered when people stop recording transactions after the initial, subsidized formalization, and Arruñada believes that owners arent underestimating the value of title but rather title suppliers are overestimating it.

To work, registries have to be independent of all the parties involved.  This means that the state is the appropriate manager, assuming it is not corrupt.  And registries must be public or at least open to potential third parties.  But Arruñada, in classic libertarian mode, tells us that registries have inherent limits because theyre run by public organizations (he advocates performance-based pay to combat this tendency, which seems odd given his acknowledgement of the role played by private short-termism in the 2008 crisis), and because they reduce transaction costs, thus threatening the livelihoods of lawyers, notaries, and other people involved in the conveyance process, who often succeed in fighting registries politically.  Among other things, Arruñada doesnt like professional monopolies, such as requirements to have lawyers or notaries involved in land transactions; he contends that sufficiently well-functioning registries can substitute for them, especially when backed up by the ingenuity of the private sector, which will offer services that help owners navigate the registries.  (Cf. Deborah Gerhardts work on the role of lawyers in trademark registration applications.)

Arruñada argues that one should not see local forms of property, ones that rely on personal transactions, as mere customary versions of impersonal property regimescustomary regimes cannot easily be adapted into impersonal regimes.  Even developed market economies, he argues, often have outdated law that treats personal exchanges as the rule and impersonal ones as the exception, to the detriment of impersonal exchanges.  As for less developed market economies, their local legal orders cant support transactions outside of the localitythe very thing that makes them legitimate as between locals makes them biased when a local and an outsider transact.  One example: in urban Ecuador, having a man in a household makes land harder to sell than when female-only households try to sell; he posits that this is because buyers fear that [male-present households] might be able to claim the land back.  At the same time, those households can rent more easily, because they rely on self-enforcement and men are (expected to be) more violent. 

Arruñada advocates that titling programs therefore should be targeted at communities with weak informal legal orders and young communities.  The big difference in who resists law supporting impersonal transactions, he says, is that in less developed economies its general social or economic classestribal chiefs, the nobility, land tenants, and current debtors”—while in more developed economies its the professionals who specialize in providing palliative services to facilitate impersonal exchangemainly lawyers and conveyancers who draw up formal documents.  These are presented as artisan solutions, whereas impersonal exchange requires industrial, mass-produced contracts, default contract rules, and registries.  Thus, colonial powers such as France and the United Kingdom in Africa, as well as the United States in the Phillipines, introduced land registration in their colonies while keeping more traditional systems of privacy and recordation in their homelands. Apparently, colonies had stronger bureaucracies and weaker professions.  But professionals arent the only ones to blame; so is simple legal inertia and path-dependency.

Solutions should be situational: markets need institutions that match their scope.  Another example: Cattlemen in the US West could enforce their rights locally, but needed government intervention to make branding effective because cattle were traded across long distances; they thus pressured government to create brand registries, to ban driving unbranded cattle from a range, and to regulate and inspect cattle sales.  Thus, a larger market requires larger authorities, which may constrain local jurisdictions through common rules (which also sounds like a description of the evolution of international trade).  For land, this often also means introducing a numerus clausus that nullifies or degrades some customary and communitarian property rights.

Without political authority, private parties may try to develop institutions to do nearly the same thing, such as networks involving collective responsibility (usually among ethnic groups, for example with small groups of borrowers in microcredit schemes) or private registries (as with the US mortgage market).  Collective responsibility, however, relies on personal ties that tend to weaken just as trade and development increase.  And partipants in the US mortgage market developed MERS, which purported to be a national registry but didnt impose sufficient controls to actually track things.

Arruñadas arguments about the 2008 crisis were the weakest part of the bookhe blamed it on the fact that the United States has poor institutions for publicly recording land transactions. They are plagued by the obsolete design of public recording offices, the poor incentives of the bureaucrats in charge of them, and the vested interests of conveyancers and title insurers. I would not have put those entities in the list of top ten causes.  The lack of a legal mandate to record a transaction in the name of the owner definitely was a problem, but I find it hard to blame the clerks for that.  Later, he says that the crisis was at least partly caused by bad incentives and poor performance by MERS and the mortgage industrys members, as well as their apparent oblivion of the judicial and political risks ever remaining on the enforcement of home foreclosures against apparently weak parties. [L]ocal courts took a narrow legalistic position against MERS in order to protect local intereststhose of borrowers. 

I can only read that last part as suggesting that contributors to the crisis were that (1) judges might actually enforce the law as written, and (2) politicians might object to massive foreclosures (although in fact they mostly intervened to foam the runway for the banks, with individual homes/homeowners playing the role of bubbles crushed to protect the bank-plane and its investor-passengers).  But neither (1) nor (2) helped start or worsen the crisis; financialization and the ultimate end of the rise of home prices did thatand by the way, the more foreclosures there are, the lower home prices go.  Speeding foreclosures would not have restored the banks to health because there would still be no one to sell the homes to at inflated prices.  Arruñada frames anti-MERS rulings as conflict between local and wider legal orders, respectively, supporting local and wider markets, without considering whether MERS actually supported wider markets or merely wider rent extraction.

Arruñada also notes that registration is hard to make complete.  Among other things, tax authorities resist having to record/risking destruction of their interests, people who benefit from complex systems like lawyers have an incentive to press for protection of unrecorded interests, and judges may feel the pull of equity (what Carol Rose calls the problem of crystals and mud). Arruñada also cautions that the government may want to use the register as a useful database for other things: enforcement of land use regulation substantially increased in Spain after a 1986 law ordered the land registry to check for building licenses as a requirement for registration.  But tax authorities have different incentivesthey want a complete register of ownership when it might not be efficient to do that.  Similarly, Arruñada is a bit worried about making registries completely public, as opposed to available only to people with a good reason to ask, because of the possibility of big data aggregation (hes not really clear on what harms he thinks might follow, but I guess we can all insert our own). 

Arruñada likes registries that are financed by user fees and that allow the administrators to keep any surplus (subject to personal liability for problems).  Fixed salaries lead to sluggishness, because Homo Economicus.  (Except that he does believe in deferring compensation by paying below market in early years on the jobthis would motivate people with a lower subjective discount rate to self-select for the job; such people are likely to be relatively averse to fraud; so Homo Economicus has varying exogenous preferences.)  But it doesnt often work that wayinstead public sector jobs pay relatively low salaries, and then with more experience workers may leave for the private sector, fully trained, leading to increased risks of agency capture.  To solve these problems, Arruñada advocates linking pay to performance and funding the registry through user fees that cant be raided by the larger government.

Arruñada also points out that effective registries need to identify individuals in order to make them legibleimpersonal trade requires being able to figure out how reliable the counterparty is, whether through public enforcement or using palliatives based mainly on private records of reputational assets.  (So, seeing like a state may be also inherently seeing like an impersonal economy.)  Still, enforcing contract rights through public means requires an independent, effective judiciary, which is often unavailable.  So, Arruñada reasons, identification of individuals may be most important in countries without such a judiciary, to allow private parties to keep records of reputations.  In fact, if its hard to foreclose on a family farm but easy to penalize a reputation in private records of a default, developing credit records for individuals might often be a more viable strategy than allowing them to use their assets as collateral, especially for the poor, because even when they have such assets, enforcing repossession after debtor default is often impossible for an outsider.  Titling systems may thus not be that helpful in increasing access to credit; banks remain more interested in salary and other income streams, which implies that better enforcement of contract rights might be more useful than better definition of real property rights. 

Likewise, developing or reforming contractual registries should occur before or along with developing courts.  Right now, for example, Indias land administration services are highly corrupt, making their records unreliable; judges naturally will not predictably rely on them.  This uncertainty, in itself and whatever the prevalence of corruption, considerably reduces the value of the registered information for transacting parties.  In fact, judges are a key target of registry reform: the register should be reliable enough for judges to have confidence in it, because the weight judges give the registry will ultimately determine its value to market participants.  Unfortunately, Arruñada says, current titling projects often focus only on registry filers and not on the understandings and interests of third parties like judges.

Arruñada ends on a rather sour note, pointing out that governments have struggled for almost a thousand years to make real property registries reliable, and 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, as shown by the fact that in most countries adding a mortgage guarantee to a loan does not significantly reduce its interest rate.

Though he doesnt talk about trademarks, Arruñada does make some claims about patent registration as analogous to a first registration for land.  Publicity provides for those whose rights are affected by the grant to challenge it.  Like land conveyancers, patent lawyers gain from bad granting decisions that increase demand for litigation.  However, patents are more uncertain in terms of legal enforcement because judges can invalidate them.  This makes sense to Arruñada because of the possibly incomplete nature of initial patent examination.  Unfortunately, the PTOs political masters seem to hold a mistaken assumption as to its main users, wrongly believing that the PTO must serve only patent applications and not the public.  Thus, (pre-AIA) the PTO had turned into a de facto recording system, not a true registry, even though the presumption of validity was still being afforded.  The resulting uncertainty generates litigation and provides a paradigm of registry mismanagement by showing how registration systems can be transformed into recordation through poor decisions.  Cheaper registration means more litigation later.  Arruñada advocated stronger incentives for examiners, giving more weight to variable compensation and introducing examiners liability for mistaken decisions, which he also thought would reduce the length of the examination period.  Query whether the fixes actually attempted by the AIA would meet his approval.

I havent tried to recast the books insights in terms of trademark registration, which (like patent granting) is supposed to be a type of true registration system, involving examination to avoid conflict with other rights.  Trademark registration is voluntary, and looks to remain so, indicating that there may be no evolution towards requiring recording/registration when there are good enough reasons to protect unrecorded interestsbut of course that makes the register less reliable.  There might be an interesting comparison between the Supplemental and Principal Register in terms of the ability to choose between land registration and land recording, as was possible in Cook County until 1997apparently rightsholders with more valuable land self-selected into the registration system.  Relatedly, Arruñada argues that legal palliatives often offer versions of one system inside the other: recordation systems often provide a simplified judicial procedure to clear title , a solution to underassurance of the most valuable land. Conversely, registration systems usually allow some kind of inexpensive filing with lesser, or provisional, legal effects. [Possessors are often allowed] to enter their claims in the register so that they are automatically upgraded to ownership if nobody has opposed them after a certain number of years. 

As between the two types, Arruñada concludes that at least in Europe registration, which is more reliabile at establishing priority of claims, outperforms recordation due to lower prices for mortgages, which result from faster and safer repossession.  There are regions in France and Italy that have registries, while the other regions have recording systems, and apparently both French and Italian authors consider registries superior but attempts to expand them have failed.  Registries, though they require substantive examination, also have lower legal transaction costs/needs for lawyers and conveyancers assistance than recording systemsthe cost of conveying real property is roughly halved.  (I really wonder whether this holds up with trademarks, where the boundaries are very hard to fix without legal interventionEurope is closer to a recording system, but are its legal transaction costs any lower?)  Consistent with his general leave-demand-to-the-market orientation, however, Arruñada says that doesnt mean that a system that spends less on registration and more on private due diligence is necessarily inefficient; it depends.

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