NCPA - National Center for Policy Analysis

Reforming the Housing Transaction

November 19, 2012

The process of buying a home in the United States continues to be antiquated and expensive. The best way to solve this is to streamline and modernize the housing transaction itself, says Arnold Kling, a member of the Financial Markets Working Group at the Mercatus Center.

There are four specific ways to streamline housing transactions.

First is the title process.

  • Title insurance provides protection against a lawsuit claiming an improper change of title somewhere in the history of the property.
  • If title laws change and the recording process modernizes, the cost of purchasing a home would decrease by hundreds of dollars.
  • Today, we could improve the title process by standardizing and computerizing property records. Records could be available on the internet.

Second is competition in real estate sales. At the moment, the market is not competitive.

  • The government should not protect the real estate cartel.
  • Additionally, by modernizing the settlement process, making it less complex and fragile. Buyers and sellers would be more comfortable using alternatives to standard real estate agents.
  • The combination of straightforward settlement and the ability to search for homes using the internet would decrease real estate commissions and align with the incentives of sellers.

Third is creating a more competitive mortgage lending process, which has two components.

  • First, the borrower's loan application needs to receive bids from multiple lenders.
  • Second, those bids must be firm commitments, not "good-faith estimates."

Fourth is easier foreclosure.

  • One misguided idea about housing policy is that consumers benefit by making it difficult for lenders to foreclose on mortgages.
  • However, in the long run, lenders pass on high foreclosure costs in the form of higher interest rates to all borrowers.
  • A better model is streamlining the foreclosure process. If borrowers cannot make their payments current, they should be evicted as soon as they are more than 90 days in arrears.
  • The main reason that costs of foreclosure are high is that borrowers strip and damage properties before they are evicted. Such losses could be preventable.

Source: Arnold Kling, "Reforming the Housing Transaction," The American, November 13, 2012.


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