Revenge of the Paperless Office

It seemed like a good idea at the time -- replacing cumbersome paper documents with more efficient electronically-traded mortgages. But the Washington Post reports the practice may have helped create an epidemic of defective titles that threatens to shut down the foreclosure process and thereby create a new wave of banking crises:

For struggling homeowners trying to avoid foreclosure, it could mean an opportunity to challenge the banks they argue have been unhelpful at best and deceptive at worst. But it also threatens to leave them in prolonged limbo, stuck in homes they still can't afford and waiting for the foreclosure process to begin anew.

For big banks, "there's a possible nightmare scenario here that no foreclosure is valid," said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition.

Unclear in all of this is just who is to blame. The financial system's failures are all too similar to the Deepwater Horizon spill. The overlapping responsibilities of BP, contractors and regulators, substitute bank executives, vendors of electronic services and the attorneys who should have assured valid title under multiple international, federal and state jurisdictions cloud the issue. And then there's the problem of fraud; The attorney general of Ohio, Richard Cordray, has already played the Nazi card:

"Fraud is fraud. If you're ordered to violate the law and you violate the law, you're not innocent," he said. "That's the Nuremberg defense. In the trials after World War II, the defendants, the Nazis claimed, I did this, but someone ordered me to do it. You can't just say you're not responsible because someone told you to do it."

(The individual accused of fraudulent documentation has had no comment so far, but his company denies any illegality and "expects to be fully vindicated by the Ohio courts.")

The "robo-signer" issue shows what's possible when a legal system based in part on precedents going back to 1066 meets technology that's closer to 2066. Practices still praised very recently for efficiency have the potential to cost billions of dollars in legal fees and housing market disruptions -- even if the banks ultimately prevail.

Blind adherence to paper documents has costs and risks, too. But the possible debacle shows that it is advocates of innovation who should take potential problems most seriously and help users avoid their many pitfalls. Case in point: Electronic medical records have many potential benefits but if not properly implemented and maintained can lead to new categories of malpractice.