Do you want some earth-shaking news? In showing us a first tentative glimpse of its new mortgage lending product, Zillow.com may in fact be reinventing — and perfecting — Capitalism

I’m going to get the newspaper news out of the way first:

Starting now, if you are a loan originator, you can register with Zillow.com to receive mortgage and refinancing referrals from that Seattle-based internet start-up, once it ramps up its full — but still Top Secret — mortgage lending product. From Zillow’s PR team, presumably in the form of a Zillow Blog post:

To participate in this new product offering, lenders must have their professional status confirmed prior to connecting with borrowers, so we want to give lenders a head start on the process:

1. Register with Zillow, if you haven’t already.
2. Then apply as a lender, and answer a few questions about yourself.
3. While access to borrowers is free, a one-time application fee of $25 is necessary to cover the costs of having an independent third party confirm your professional and employment status to Zillow. This is the only charge to participate; there are no other fees.

Why register early? The confirmation process can take up to several days. By registering early, lenders ensure they will be among the first to be notified when the product launches and ready to service borrowers on Day 1. We’ll also send out an e-mail to all pre-confirmed lenders giving them notice immediately after launch.

I don’t know what form Zillow’s lender referrals will take, but the important point — to which we will return — is that only duly-registered loan originators will be receiving them.

Zillow takes some pains to take away your fear of future pain:

While we’re not sharing more details right now, we can say that we’ve built our product around Zillow’s model of openness and transparency that is increasingly important in today’s home lending environment. And, consistent with our information-based model, we have no intention of being part of the transaction.

There’s a sweet little teaser at the end:

And if you happen to be in the market for a home loan, stayed tuned to this space as we announce an entirely new kind of mortgage offering built just for you.

Brian Brady believes that what Zillow will offer as its sticky mortgage product is a sort of interest-rates Zestimator. In other words, a potential borrower will fill out a form, much like the pre-qualification calculators you see everywhere. The prospect might volunteer a gut-feeling FICO score — although I am willing to bet that Zillow can Zestimate FICO scores from someone’s home address. In any case, once the wanna-borrower hits the “Submit” button, the software on Planet Zillow will cough up a range of possible loan products, with Zestimated interest rates, qualification amounts and monthly payments — a pre-pro-forma, if you will. That’s pure speculation on Brian Brady’s part, embellished by me, but it smells right, doesn’t it?

Okay, so that’s the news you could have gotten anywhere else. Brian’s theory is probably more than you’ll read elsewhere, but I know Dan Green was briefed on this product, and he may have a better take on it. Morgan Brown has more, also. Todd Carpenter and Rhonda Porter, too.

Here is the earth-shaking news — and I owe this to Brian Brady, too. He saw what I did not — and what you probably also did not see — in the text that I quoted above, plain as day.

What did we miss?

This:

confirm your professional and employment status to Zillow

What does it mean?

Zillow.com is creating a de facto national “seal of approval” for mortgage loan originators.

This is right up my street. Occupational licensing laws are a bad joke on the consumer. At best, licensing is regulation by the regulated, cronyism punctuated by outright crime. At worst, a state-issued license is sheepskin camouflage for the most ravenous of wolves.

What is sought for licensing — or what it thought to be the good-willed intent of licensing laws — is what the law can never achieve: A policing of the better and the worse, of those practitioners who can be trusted and those who can’t. Why can’t the law achieve this outcome? Because nobody’s dinner is at stake. No one prospers for having been right, and — much more importantly — no one goes hungry for having been wrong — no one, at least, other than the poor consumer who was gulled into thinking that the license actually meant something.

State-issued licenses are consistently abused not because they are working improperly but because they are working in the only way they can work. Ignoring all the incentives to corruption a license occasions — and these are legion — the licensing system is itself inherently corrupt. Lacking the incentives and disincentives provided by a true Capitalist marketplace, the licensing authority lacks any motivation to do that policing of the better and the worse. Only when the public outcry becomes insufferable can the tax-payer’s trusty time-servers stir themselves to action — exactly as much action as is necessary to quiet the public outcry.

The failure of occupational licensing is not some temporary aberration — where “temporary” is an uninterrupted span of almost a century in the United States. No, occupational licensing is an endemic, epidemic, pandemic failure because it cannot be anything else. Free-market firemen would spend all the spare time their job entails looking for and cleaning up the causes of potential fires. Tax-payer-supported firemen watch a lot of TV. The difference is not a temporary aberration. The incentives are perverted, and, therefore, unavoidably, the results are perverse. To expect otherwise is the reflection of a childlike wishful thinking — endearing only in children, and, even then, only for a little while.

What does this have to do with Zillow?

Repeating: Zillow.com is creating a de facto national “seal of approval” for mortgage loan originators.

No, Zillow is not creating the free-market equivalent of a national loan originator’s license — not now at least. A very bad skip-trace costs a hundred dollars, so the background check Zillow can get for twenty-five bucks cannot be any big deal. Are you licensed if your state requires a license? Are you employed by a licensee if your state permits sales reps to work for licensed originators? Anything huge in the way of a criminal record? Maybe a credit check, if only to look for evidence of fraud. My take is that in brokering loan referrals, Zillow is incurring legal liability if something should go wrong, so they’re going to do $25 worth of CYOA to make sure they aren’t feeding sheep to wolves.

But what about lead vendors like LendingTree.com? Don’t they vet loan originators? I would expect they do, but as an artificial chokepoint on the transactions, lead vendors have a built-in incentive to corrupt behavior — to feed leads not to the best practitioners but the highest bidder. Well then, what about the nascent reputation management vendors? So far, at least, these have proved themselves to be paper tigers. Perhaps not coincidentally, the most toothsome of reputation management vendors to hit the market so far is Avvco.com, an attorney-watchdog founded by Zillow.com CEO Rich Barton.

Today’s news is interesting by itself, but what’s more interesting is simply the fact that Zillow.com is doing this, and they’re doing it, in effect, on a national scale. The hurdle to be leapt is almost nothing, just enough of a screen to filter out liars and frauds. In many, many states, this is more than the licensing authorities are doing. But much more importantly, Zillow has free-market-engendered incentives to actually do the screening it proposes to do. It stands to gain in stature — and thus to profit financially — if it recommends good lenders. And it stands to lose stature — and possibly lose lawsuits — if it recommends bad lenders. The risks and rewards are balanced as only a free-market can balance them, and so, in consequence, Zillow will succeed instantly and persistently at doing what state-licensing authorities consistently fail to do.

I don’t want to oversell today’s news, but this is a truly epochal change in the way the real estate industry is governed. I’ve likened Zillow.com to Ebay.com and Wikipedia.org before, and this is another step in that evolution. On Ebay, a trader’s dearest asset is neither goods nor gold, but his reputation for honesty. Abuses of the type decried by weepy college professors are possible, but only topically, and only in the short run. In the long run, criminal behavior is flushed from Ebay, with the result that the most-crime-free market in the history of markets is the one that has no cops — nor even any security guards.

The same kind of balancing of rights and responsibilities occurs on Wikipedia, only there the coin of the realm is nothing tangible but simply one’s reputation for expertise — and excellence in the expression of that expertise. The most common rejoinder you will hear, should you propose repealing any law, is this: “But what would prevent _________?!?” — where you fill in the blank with whatever is that person’s private horror. What prevents abuse on Wikipedia? Nothing, really, except that the people most serious about preventing and repairing damage are also the people who are most serious about maintaining their own reputations as good stewards of the encyclopedia. Rights and responsibilities are balanced, and the whole thing works beautifully — without cops, without threats, without fines, without prisons — without the giant apparatus we have built to forbid everything and criminalize everyone in the name of something that we used to call freedom — before it was outlawed.

If you’d like to see the opposite, rights and responsibilities in an imbalanced state, you need look no further than Craigslist.com. Users have the power to “flag” ads, resulting in their being deleted from the system, but doing so is without consequence to the user issuing the flag. His flagging doesn’t leave tracks, as it would on Wikipedia. It doesn’t affect his own reputation, as it would on Ebay. What is the consequence? What would you expect? Rampant, epidemic abuse. The system is inherently corrupt, and the fact that this corruption is endemic, epidemic, pandemic is not some temporary aberration. (Want a quick fix? Give Craigslist users a total of six flags for any rolling 30-day period. Flag too much, you’re out of the game. Flag too little? Better to have a flag and not need it. If the point is to attack true abuse of the system and not to sanctify censorship, any sort of limit on arbitrary power would be an improvement.)

Oh, but this is all just the on-line world! In the real world, things are more complicated!

Are they? I think what we’re learning from on-line systems is what we could have learned in the Progressive Era in the United States. What the British and the Romans before us had sought desperately to learn. What the Greeks in Athens, at their apogee, understood but could not implement. The reason that reputation management works so well on Ebay and Wikipedia is not because they are ephemeral spaces, virtual worlds where criminal behavior has no consequences. Ebay, in particular, is no less a marketplace than Amazon.com, no less a marketplace than the strip-mall up the block. You can’t be mugged on Ebay, but you certainly can be ripped off.

The difference between on-line and real-world reputation management has nothing to do with a facile distinction between electrons and atoms. The difference is the relative efficiencies in data processing. The strip-mall convenience store just might be selling you out-dated milk, but you have no way of checking its reputation. On Ebay, you not only know how much trust you can put in a trader, you can — and often will — read every bit of feedback that trader has received.

This is what Zillow is doing — national, verified reputation management for loan originators. It’s really, really nothing for now, not much beyond a pulse check. And yet it is everything, because it is the free-market asserting its natural right, its sacred obligation, and its uniquely-inescapable power to police itself.

Do you understand? Where markets do not self-police — as with Craigslist.com and, more importantly, as with state occupational licensing laws — endemic, epidemic, pandemic corruption is the only possible outcome. These results, which we patiently observe almost without exception, all the while insisting that they are only temporary aberrations — these results are the only possible outcomes of arbitrary decision-making systems.

Socialism always fails — and it always results in enormous mass graves containing the remains of millions of murdered innocents — not because of some temporary aberration. Socialism fails, Fascism fails, Progressivism fails because they are all attempts to supplant the sometimes-imperfect reason of the marketplace — the weighing of incentives and disincentives — with the consistently-perfect irrationality that is brute force.

Ebay works because bad actions have bad consequences for the actor. Wikipedia works because behaving badly will give you a bad reputation. Craigslist does not work because acting capriciously or even with the vilest of intentions has absolutely no effect on either your wealth or your social status. Occupational licensing laws do not work because enforcing them is onerous and yields no benefits to the enforcer — and may actually put that person’s career at risk — where doing nothing — all day, every day — pays well and offers great benefits.

Will Zillow’s small foray into reputation management work? You bet.

Here’s a better question: Why not do the same thing for Realtors? (Or would you prefer to say to Realtors? If you would, you understand perfectly the difference between honest and corrupt oversight of practitioners.)

Here’s an even better question: Once Zillow has its standards in place, will it periodically increase the expected level of qualifications? Whenever I talk about repealing licensing laws, I draw attention to the Underwriters’ Laboratories:

When buying electrical equipment, if you could have either government regulation or oversight by the Underwriters’ Laboratories, but not both, which would you choose?

Zillow.com — or some other free-market entity — has the ability to become a sort of Underwriters’ Laboratories for real estate professionals — a tester and verifier of strict standards of quality. In other words, it can actually deliver what is sought from occupational licensing laws, it can make manifest, at last, the actual good-willed intent of licensing laws.

There’s more. Zillow.com or another market player can effectively supplant the National Association of Realtors simply by exceeding that dinosaur’s lame standards and practices. A free-market entity regulating real estate professionals by granting or withholding its “seal of approval” can effect reforms far beyond any that might be achieved — even in the imaginary world of strangely-permanent temporary aberrations — by force.

What’s to prevent abuses? That free-market entity’s high regard for its own reputation. There is no such thing as a real world where crime or corruption are impossible. But where rights and responsibilities, risks and rewards are most-perfectly balanced, you normally have the least cause to fear crime and corruption and the greatest cause to expect profit and innovation.

You have been lied to your entire life about Capitalism. This is Capitalism in real life, not in that comic book about arch-villains you were told was an Economics textbook. What Zillow.com is doing right now, even so tentatively, is what Capitalism could have, should have and ultimately would have done in the years after 1848 — when The Communist Manifesto was published — if the world had not fallen in love with the idea of pushing innocent people around at gunpoint.

One-hundred-and-sixty years later — and one-hundred-and-sixty million political murders later — that is to say, your own mother shot dead for “hoarding” the “peoples'” food so that scrawny, whiny little you might not die of starvation today — after eight score years of discovering every possible way that force must always fail in the marketplace, now, at last, we have a chance to return to the rule of reason.

Am I imputing too much honor to Zillow? Am I weighing them down with too much gravitas? Possibly. But now the djinn is out of the bottle. If they do not follow up with ever-better ideas in free-market reputation management, some other vendor can and will. As with the “free” economy, the difference between something and nothing is everything. Now that consumers have something they can depend on, they would be fools to settle for less — and brilliant Capitalists to insist on more.

The world of Web 2.0 is the world that Socrates truly deserved, but, as a by-product of the information-inefficiencies of his epoch, could not have. On this day you are seeing born an Athens-perfected. We might lack the wisdom of the Greeks, but the information we need — not just to live but to thrive — is evermore close at hand. Zillow just moved it a little bit closer.

A small bit of news with enormous implications. Mark this day. Your world just changed, forever, for the good.

 
Elsewhere: Morgan Brown, Drew Meyers. No one else at 10:40 pm MST. Zillow Blog, Todd Carpenter, Rhonda Porter. That’s it by midnight MST, two hours after Zillow’s embargo on this news lifted.

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