[Continued from yesterday's Part 1.]

In yesterday’s exploration, we suggested that if you want to understand a housing finance ecosystem and lack the statistics or reference resources to compile a proper survey, you can do well by conducting a simpler ‘physical exam.’

Is that all I am to you, just a pretty johnny?

Any given housing finance ecosystem processes activity across three dimensions – homes, people, and money.

Locate yourself in space and you define yourself relative to others

By poking and prodding the system as it processes residences, occupants, and money, you can deduce its functions.

I’m sure one of these links to her motivation

Yesterday we covered the concept and Question 1, how do I find housing, and what types are available?

Once you’ve found your desired pied a terre, you have to secure possession. 

Question 2: Selling and buying

If I own housing and you want to own it, how does the system recognize transfer of ownership from you to me?

You’ve found a place you want to own – my place – and I’m ready to sell it to you for an agreed price.  I need your cash; you need evidence that you’re the owner now.

A Turkish title deed: note the owner’s picture!

Between us and the transfer stand a host of professionals who specialize in these handoffs.  Who handles what, what documentation (pieces of paper), what do they say, how are they prepared and signed, who holds them?  What certificates, what protections, what recourse to authority?

You’ll have questions like these:

1. How do you know I own it?
2. What defines my property?   Does it include land, outbuildings (garage, shed), furnishings and fixtures, utilities and systems?  How are its boundaries specified, and why is that specification accepted in the wider world?
3. How can you later prove that you have now acquired ownership from me?
4. Via what piece of paper (if any; in some places, understandings are verbal) is my ownership currently documented?  A deed of title, a purchase receipt from a previous owner?
5. Where can you expect to find or examine my documentary proof of ownership? How do we designate a neutral repository (escrow agent, lawyer, realtor) to hold the valuables – money and certifications like title deeds – while we’re preparing for the closing?

This question gets to the roles and services in the title transfer value chain, both the governmental side (recordkeeping, recognition of transfer, and neutral enforcement) and the private side (professionals involved) and will touch on all these real or potential professionals:

• Closing attorney to prepare the new title deed (and the purchase and sale that precedes it).
• Registry clerk who places in the new title in the great big book and gives you the filing and recordation information.
• Title insurer.  Warrants that your new title is good, and will pay you the property’s value if that proves false.
• Real estate broker or estate agent.  Match-makes between sellers and buyers.  Brokers always face the question of who works for whom.
• Mortgage broker.  Represents you in searching for the best financing.
• Surveyor makes a detailed and personally inspected map of your demesne (pronounced domain), so as to provide the metes and bounds. 

Everything inside the rock wall is my demesne

(Love that Middle English!)

Whan that blogger with his essayes wroote
The metes and bounds hath posted the Web soote,

Depending on where you are in the world, and what type of residential property you’re seeking to transfer, you’ll encounter more or fewer of these folks.  Each check you write, at the closing table or before it, pays for a link in that value chain, a link done by a professional who is (usually, or at any rate supposed to be!) more expert than a generalist, and a vast leap over your effectiveness if you tried to do it yourself. 

The more checks you write at the closing table, the better your ecosystem; while I won’t claim this postulate as absolute fact, that’s my instinct. 

That’s pretty basic, isn’t it?

How do you the newcomer learn about the mechanics of property transfer?

In most developed nations, that’s pretty simple – just Google “home purchase closing” or similar phrases.  Further, many countries have consumer-protection or consumer-disclosure laws that make it easy to learn what you need to know.  In the US, for instance, we have:

The Real Estate Settlement Procedures Act (RESPA), which has been around for 35 years (since 1974, holy moly) as a consumer protection statute:

We need settlement procedures

1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.

Additionally, any professional association (like the US realtors) will have extensive exposition, and a little bit of poking around will reveal dozens of law firms eager to let you download standard agreements.  Indeed, looking for the forms will also surface the types of practitioners who specialize in transactional services, and they in turn will lead you back to the sequential steps.

Similarly, the settlement statement – a standard form listing what costs for what services might be paid at the closing – acts as an effective checklist of possibilities.  A good example is the HUD-1 settlement statement (link in .pdf), which zeroes in on possible costs, as shown in the large image below.

If HUD thinks you might be paying these, there’s probably a good reason why

Well-developed (and typically higher-income) ecosystems have these mechanics down pat, so much so that everyone takes them entirely for granted.  As a result, first-world investigators who travel to developing nation environments often presume they know how the system works when in fact they don’t.

Hence it’s important, in less-developed ecosystems, to forget everything you think you know about the property transfer value chain, and start from first principles.  One learns by asking the same questions, over and over again, walking step by step through the imagined process and collecting samples of the documents along the way.  Most significantly, how the process works in the formal world of mortgages and electronic records often differs dramatically from how it works in the informal world of unregistered property, cash transactions, and verbal rather than written rights.

Tracing the mechanics of a transfer of ownership, and the recognition/ enforcement of that transfer, also expansively touches everything to do with the broader society and property rights – and that, being one of the pillars of a liberal democratic society, provides a window into government’s functionality, integrity, and legitimacy.

Somebody’s worried

However, such speculations into political philosophy would take us ‘beyond scope’ (as the compleat consultant would say), so let us stay with the more prosaic element of that single dwelling unit.  You’ve located and chosen it, you’ve agreed with its owner about your occupancy.  Now you have the last piece – you have to pay for it.

“Hamburgers!  The foundation of any nutritious breakfast.  Do you know what a quarter-pounder costs in France?”

[Concluded tomorrow in Part 3.]

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By: David A. Smith

If you get a new doctor, what’s the first thing he or she does – after establishing how you or your insurance will pay, of course? The physical exam.

We make them cold so that we know you’re dead if you don’t flinch

When we don’t know how a system works, what do we do? We palpate it.

Tell me if this hurts

We shake it and hear the rattles.

Louder sounds are better, aren’t they?

We twiddle the knobs and observe the changes.

Wonder if this detonates it?

Indeed, long before we had any taxonomic understanding of medicine, we tracked biological processes by their outputs, whether in reading the entrails of a goat or examining the patient’s stool.

What comes out reflects what went in …

… and what happened to it on the way through

In the modern era, we do the sample systemic analysis remotely, with radioactive isotopes that serve as tracers through the body, highlighting circulation and concentration, learning about the system by following particles on their way through it.

If I were you I’d worry about the glowing parts

In the same way, when we consider a housing finance ecosystem, the blood plasma is money, and its tracing is a time-honored investigative technique.

“Follow the money”

When it comes to housing, the money moves in three dimensions: homes, people, and money:

1. Homes. Providers and consumers finding each other.

2. People. Sellers and buyers exchanging money for consumption and use rights.

3. Money. Capital providers and capital consumers financing a home purchase.

Understand these three dimensions and you go a great ways toward placing an ecosystem in its space.

Thus, if you come new to a housing finance ecosystem, either because you’re visiting a country and want to buy or rent a home, or as a student, researcher, or consultant tasked with designing a new program intervention, you can learn a lot about the ecosystem if you follow the money through each of its three dimensions.

Use all three eyes and you’ll see the full dimensions

Keep on truckin’ for insight

The investigative technique

To understand each process, follow it step-by-step, actor by actor, cost by cost. Take a journey through the system, getting up close and personal with each of its elements.

Pretty fantastic voyage, if you ask me

Imagine yourself starting the journey, a hopeful fool empty of knowledge, and ask yourself, How do I encounter? How do I interact? What money changes hands, how and for what purpose?

My ignorance and my bundle are soon parted?

Question 1: Owner-consumer value chain

If you have housing (to rent or sell) and I need housing (to occupy or buy), how do we find each other and what kind of tenure relationships could we establish?

You’re new in town, and you need a place to live. Think of all the sub-questions you’ll have.

1. Can I find plenty of places, or are they scarce?
2. How much space can I afford?
3. Can I buy or do I have to rent?
4. If I want to buy, how far out of downtown do I have to be?
5. Is there enough good-quality rental?
6. Is the government in the business of providing housing?
7. Is the government in the business of subsidizing the supply side (helping create more homes)?

Now I’m going to ask you a simple question – do you feel … lucky?

This simple question – what housing is around? – gets at everything to do with the supply, flexibility, and affordability of housing:

• Ranges of tenure. Ownership, condo, co-op, shared ownership, rental, affordable rental, rent-controlled rental, roommates, public housing. Which of these are formal, which informal? What gray tenures exist (like in-laws apartments, illegal sublets, or overcrowded student housing)?
• Diversity of configuration. Apartment types, bedroom counts, flats or gardens or townhouses or duplexes or free-standing bungalows.
• Cost and affordability. What percentage of income do households pay for occupancy? How does this vary by tenure? How are utilities provided, and who pays them?

How do you the newcomer find out housing supply, configurations, tenures, and costs?

• Ask people.
• Apartment guides.
• Newspaper advertising.
• Banners and flyers and signs. (Learn how they advertise FOR RENT and FOR SALE.)
• Realtor/ real estate broker/ estate agent shop windows. Nancy and I have got into the habit of staring at these pretty much anywhere we find them. We’re always astonished at how little you get for your money in the UK or Europe.

Each window pane is another comparable

(Except the Uncle Sam, who wants You to Buy)

Remember, every form of configuration, tenure, and price point exists because somebody thinks that’s the right niche for some fraction of the market. By their homes ye shall know them.

Further, the question also opens a window into the property-transfer value chain, including what types of markets link property providers (owners and landlords) with property consumers (renters and buyers), and conveniently bringing us to the second question.

[Continued tomorrow in Part 2.]

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