Long review: of land (and other) registration

Benito Arruñada, Institutional
Foundations of Impersonal Exchange: Theory and Policy of Contractual
Registries
: This book
s only significant weakness is the extremely dry and
abstract way in which it
s 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 transactions
not 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
creditor
s
name and amount of the debt.  Arru
ñada
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 aren
t 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 Arru
ñada
believes that owners aren
t 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 Arru
ñada, in
classic libertarian mode, tells us that registries have inherent limits because
they
re
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, Arru
ñada
doesn
t
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 Gerhardt
s 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 regimes
customary 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 can
t 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 it
s general social or economic classestribal
chiefs, the nobility, land tenants, and current debtors
”—while
in more developed economies it
s the professionals who specialize in providing palliative
services to facilitate impersonal exchange
mainly 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 didn
t impose sufficient controls to actually track things.
Arruñadas arguments about the 2008 crisis were the weakest part of
the book
he
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 industry
s 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 interests
those 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 that
and 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. 
Arru
ñada
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). Arru
ñada 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 incentives
they want a complete register of ownership when it might not
be efficient to do that.  Similarly, Arru
ñada 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 (he
s 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 job
this 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 doesn
t 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, Arru
ñada
advocates linking pay to performance and funding the registry through user fees
that can
t
be raided by the larger government.
Arruñada also points out that effective registries need to
identify individuals in order to make them legible
impersonal
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, Arru
ñada
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 it
s 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, India
s 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, Arru
ñada
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 Arru
ñada
because of the possibly incomplete nature of initial patent examination.  Unfortunately, the PTO
s 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. 
Arru
ñada
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
interests
but
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 1997
apparently
rightsholders with more valuable land self-selected into the registration
system.  Relatedly, Arru
ñada
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 systems
the 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
intervention
Europe
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, Arru
ñada 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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