Private Sector Efficiency?

Mark Thoma sends us to this Washington Post article about an apparently low-paid private sector employee who has been signing off on GMAC mortgage foreclosures at the rate of roughly 10,000 per month with little regard for the accuracy of the documents he was signing.

...as the leader of the document execution team for GMAC Mortgage. He has signed off on as many as 10,000 foreclosures in a month, according to court documents. That's barely a minute per case, assuming he works a normal eight-hour day.

His signature indicated that the information in the cases was accurate to the best of his knowledge, and that he had signed in the presence of a notary. The problem was, that didn't always happen, according to depositions that Stephan gave in December and June for court cases involving families trying to keep their homes.

Stephan's admission has cast into doubt thousands of mortgage foreclosure filings. Ally Financial, the nation's fourth-largest home lender and GMAC's parent company, halted evictions of homeowners this week in the 23 states that mandate a court judgment before a lender can take possession of a property.

Calculated Risk sends us to this article about a Florida man whose house, bought and paid for with cash, was foreclosed on by Bank of America.

When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. "I feel like I'm hanging in the wind and I'm scared to death," said Grodensky. "How did some attorney put through a foreclosure illegally?"

Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.

The same article describes one real estate agent's attempt to halt a foreclosure because she had a buyer. Unable to halt it, the bank foreclosed and is now listing the property for less than the buyer was willing to pay. Apparently private sector firms that are too big to fail are also too big to achieve that ultimate of neo-classical economics accolades: efficiency. Or maybe it is efficient to foreclose and sell for less rather than halt foreclosure and sell for more? In that case, is efficiency all that we should care about?

Regular readers know that one recurring theme in this blog is that concentrated economic and political power in the private sector is as much a "problem" as an ineffective, inefficient guvment especially one that has been deprived of the funds needed to regulate a complex capitalist society based on commercial exchange and characterized in some sectors (like health and finance) by several types of market failure. Regular readers also know that as someone who grew up in a private sector family business, I expect  private sector employees and their managers to behave better than caricatures of mindless guvmint bureaucrats that populate cautionary tales about totalitarian guvmints.

It should also be noted that it was in a government court that the GMAC travesty was exposed and halted. I also deduce from the article that there are 27 remaining states that do not mandate a court judgement before a lender can take possession of a property (that is to say, they do not have this regulation) and that in those states foreclosures may be continuing unabated thanks to Mr. Stephan's very efficient, but highly unethical rubber stamp.

It's a problem when guvmint is always and everywhere perceived to be the problem. It makes it difficult to pass legislation that would protect homeowners, borrowers, small businesses, renters, consumers (all the people who fuel and benefit from economic growth and prosperity) from corporate abuse of political and economic power. Next thing you know, we're living in Potterville, instead of Bedford Falls.

In this case, there's definitely a problem. I don't think its the government, however (although as you can see  government helped by serving the papers and evicting the homeowners).

Broward Chief Judge Victor Tobin, who set up the county court's foreclosure system, said this is the first he's heard of this type of mistake. "From the court's point of view we have no way of knowing that someone sells a house unless they tell us," said Tobin. "The bank would first have to tell the lawyers and the lawyers would presumably ask the court for an order dismissing the case."

Let's hope it's also the last time Judge Tobin hears of this type of mistake. It sounds so simple doesn't it? In one case, the bank would have to do its job and tell the lawyers. The bank's lawyers would have to do their jobs and ask for a dismissal. In the other case, the bank would have to halt the foreclosure and sell the house to a willing and qualified buyer for a higher price than they will get if they foreclose. Complicated, yes? It's amazing how a taxpayer-funded bank bailout could be arranged almost overnight, but stopping an erroneous bank-initiated foreclosure of a taxpayer's home can take weeks or months (and thousand of homeowner dollars in legal fees, I'll bet).

In economics, we teach that firm size and market power can lead to monopolistic pricing that results in loss of consumer welfare. Most of that discussion, at least in intro courses, focuses on the monopolistic firm being able to set price higher than marginal cost (in a competitive equilibrium we would expect price to equal marginal cost). When a firm has sufficient market power to set price higher than marginal cost, consumers lose because they pay a higher price and they purchase less of the good. The higher price deprives them of money that could otherwise be spent on other goods and services. The above suggests that for large firms with concentrated economic and political power, monopoly rents might be the least of our worries. Far worse is that they appear to have the potential to inflict long lasting harm on people who lack the resources to hire an attorney to defend themselves from efficiently, but improperly,  processed papers and unreasonable seizure.

Just ask yourself, as I often do, was your last unpleasant encounter with a cell phone company, a cable television company, a credit card company, or a bank or was it with a government agency?  In my case, I'm sorry to say that some of the larger, more powerful parts of the private sector lose hands down.

Comments

[Bob]

Great points. Due process is, perhaps, the most important component of government action or regulation of private enterprise. At least the defendants in Kelo v. New London had such due process on their side - and the Supremes still nixed the action as a "taking."

http://en.wikipedia.org/wiki/Kelo_v._City_of_New_London

[The Raven]

I was reflecting on this the other day, when a car rental agency tried to hard-sell me collision insurance at 60% of their rental price for the vehicle. They had their hard-sell tactics in line and these included veiled threats; it was obvious that they'd been trained in them. I expect that, should there be damage to the vehicle, they will carry through on their threats, and I will have some hours or days of work clearing up the mess they would make.

Our relations with major businesses take on a more and more extortionate character. I wonder how long it will be before they return to threats of physical violence.

Hey, more food for corvids!

[Bruce Wilder]

Economics has some serious deficiencies as a framework for analysis, and one of the most serious, is that abstract convenience, the production function: the assertion that output is a function of inputs depends on the assumption all the technical and managerial and organizational and administrative problems of production are magically solved. It's a convenience when you want to focus analysis exclusively on the problems of allocative efficiency. It's an obstacle to understanding, when, as in the present case, you are interested in problems of some species of technical efficiency, such as administrative efficiency.

The intro course models of perfect competition and monopoly are absurd, and obviously wrong-headed in more ways than I can count, and they are lousy guides to the constraints and forces, which shape the actual economy.

Perfect competition rests on an assumption of zero strategic behavior -- an obviously impossible condition. Monopoly doesn't work, either -- restraining output to raise price is practically impossible for a durable good, and suboptimal in all other cases.

Most firms have a technical cost structure, which is heavy on sunk and overhead costs, so marginal cost is less than market price, regardless of the competititive environment, and in many, if not most, cases, marginal cost will be *declining* at normal rates of output. Price discrimination schemes will finance monopoly over-production, if anything. Some poor sucker is paying $500 for a license for Microsoft Office even as I write, and that product has a marginal cost of production somewhere south of $10/unit.

But, all of that discussion of so-called "market" price -- when most observed prices are administered -- is ultimately irrelevant to the problems of administrative procedure and bureaucratic organization, which were assumed solved by the theory of the production function, aforementioned.

The problems of technical efficiency, of course, can not be assumed to be solved, as a practical matter, as they can be in speculative analysis. In the real world, they loom large, and vast bureaucracies, public and private and in-between, are created and driven forward in search of good-enough solutions (we hope) and profitable failure (we fear).

The power of giant, rule-driven bureaucracies is not born of a market "monopoly", per se; power is, as Hannah Arendt observed, a product of organization. It is the ability to coordinate activity, in a command-and-control hierarchy that generates "power". The great and powerful business corporations are not monopolies in the economist's arid sense -- they are vast, strategically driven octupus (octopi?), able to coordinate their actions and policies, with the goal of controlling production and distribution processes. That would be "control" in the cybernetic as well as political sense.

In economics, unfortunately, you teach nothing relevant. Recognizing that might a good first step toward remedying the deficiency.

[Peter T]

Does this happen elsewhere? I have never heard of anyone being able to register the sale of a house they did not own in Australia - but then we have single, universal government registries for almost all property (and have had for 150 years). Point is - why are not simple ideas like this always replicated? What are the advantages of inefficiency?

[Maxine Udall (girl economist)]

Peter T,
I believe the advantages of this particular inefficiency are private financial gains.